Running a business is a lot of work. It takes long hours, dedication, and a willingness to take risks. But all that hard work can pay off in the end, when you can finally retire and enjoy the fruits of your labor. But retirement planning for business owners can be a bit more complicated than it is for employees, especially if you’re relying on the sale of your business to make it happen.
Here are some questions you need to consider.
How much is your business worth right now?
Most business owners I speak with have a significantly inflated view of what their business is worth. Make sure you talk to an outside source to get a more realistic point of view.
While there are different methods for formally calculating the value of your business, including assets, liabilities, brand recognition, and cashflows, there are two overriding themes that will always have the largest impact on your valuation: the amount of free cashflow your business generates is the first, and the extent to which your business requires you to be involved to create those cashflows is the second. When a buyer (at least a smart one) is looking at your business, they aren’t really buying your business, they are buying your current and future cashflows. They will want to know how much cash they can generate both today and tomorrow as their return on investment for the purchase. Today’s net cashflow is easy to see, while the future cashflow is projected. One of the biggest factors in the future cashflow is how deeply your business depends on you to be there to sustain it.
How soon should you start planning?
One of the most common questions I get from owners in the position of needing to cash out for their retirement lifestyle is when should they start planning for selling. Other than the obvious answer of NOW, I usually tell them that 5 years is a good starting point, and then talk about what they need to do to prepare in the two key areas: Cashflow and Operations.
How Good is the Cashflow?
Improving cashflow is Business 101, and there are no mysteries on what you need to do to make improvements – sell more and/or make more money per sale and manage your overhead expenses. There are dozens of ways to make improvements in each of these areas, you just have to make the decision to go about improving in a disciplined, focused and sustained manner in order to get top dollar for your business.
How well does it run without you?
The second area is a little harder, but equally important – getting your business to run as well without you as it does with you. Are you the best salesperson, or the top technical expert? If so, then you need to start developing your team to be able to sell and produce without you doing it for them. Will your clients stay if you leave, or will they be loyal to the company and not just you? Will your key employees stay as well? It can easily take 2-3 years to develop the management and leadership necessary to sustain a business after the owner leaves. What are you doing right now to build your team? You need to lower your personal value to the business and raise your team’s value in order to maximize your business as a retirement asset. If you are the biggest asset, and you are leaving, what is left to buy?
Get Help from an Expert
If you are one of those planning on your business providing the funds for your post-ownership lifestyle, I encourage you to establish a relationship with a Business Wealth Planner, one who specializes in exit planning for business owners. They can help you to put together a plan that maximizes your retirement options by combining the traditional retirement plan (save a bunch of money), with maximizing the value of your largest asset, your business. They are trained to help you understand the value of your business, its role in your retirement plan, and the value drivers you can work on to maximize the value of the business when it comes time to sell.
Author: Mark McNulty, Business Coach