If you’re like the majority of small business owners, your business plays a big part in your retirement plans. Maybe you haven’t had to chance to put aside any funds for retirement outside your business, but you see your small business as your trump card; when the time comes, you’ll just sell it and retire comfortably on the proceeds.
But what if your supposed trump card turns out to be a Joker? Your whole retirement plan could collapse.
Here are the issues you need to deal with now if your plan for selling your business and retiring is going to work.
1) Do You Have Something Worth Selling?
Many successful businesses are essentially one person operations in that their success is based on the creations, ideas or even charisma of one individual. And when he or she goes, so does the business.
Others were very profitable businesses in the past but have been superseded by new technologies or behaviors. Video stores, for instance, are now in their sunset years and record stores are obsolete.
(What other businesses are dead or dying? See 7 Small Businesses You Don’t Want to Start.)
Do you actually have a business that someone else is going to want to buy? In other words, will someone else be able to profit from this business in years to come?
2) Be Realistic About Your Small Business’s Worth
What is your small business actually worth? Maybe not what you think it is.
What someone is willing to pay for your business may be nowhere near what you want to get for it. Small businesses are like houses; they're both only worth what they'll fetch on the market at the time that you sell them - not what you hope they're worth.
And sweat equity is worth nothing unless you can figure out a way to show its value in dollars and cents.
If you don’t know what your small business is worth right now, you need to find out – because we don’t all get to pick our retirement dates. A sudden illness or unexpected event can change everything and force us to retire before we plan.
A professional business valuation is well worth the money. In Canada, you can find Business Valuators through the website of the Canadian Institute of Chartered Business Valuators. Online searching and old-fashioned yellow pages will also work.
3) Start Preparing to Sell Now
If you had to sell your business immediately would you be able to? Would it be in the kind of shape that would get you top dollar – or any buyers at all?
That’s why so many advisors, such as Lou Celli, a partner at Grant Thornton LLP, tell business owners that they need to get ready to sell their business right now, no matter what their retirement horizon is.
“If you are preparing to sell a home, the first thing you do is fix up the landscaping and add a coat of fresh paint to the kitchen and bathroom. Likewise, when you are getting ready to sell a business you’ll want to improve the appearance of your track record in order to maximize the value you receive for all you have invested over the years. Ideally, you’d like to have at least three years of solid financials and sell when your neighborhood is hot, but you also need to tidy up your balance sheet, which could mean moving around certain assets or removing bad debt,” he says.
4) Create a Seller’s Plan to Ease the Transition
Three years of solid financials is a worthy goal, but it’s just one thing that needs to be done to get your small business ready to sell – just like putting a new roof on your house is not enough to make the sale.
As with any project, a list will help. Premises, business records, customer data, inventory; everything needs to be cleaned up and accessible.
And, in consultation with your accountant and/or tax lawyer, you’ll also want to consider what type of sale you want to have; asset sale or share sale. It may be that a share sale would substantially increase your profits when you sell, but to do that, you’ll need to set up your business as a corporation.
Planning Makes Such a Difference
Who wants to be the person who goes to sell their business and retire and then discovers that all they have to sell is some inventory and fixtures? Drawing up a plan to sell now and following through on doing what you need to do to make your business an attractive proposition will ensure you’re playing with a full deck of cards when the time comes to sell.