Baby boomer business owners in the United States are looking to turn their years of sweat and toil into cash for retirement, but the faltering economy rapidly turned the seller’s market of a few years ago into a buyer’s market, negatively impacting value.
Adding to their woes, the large number of baby boomers who own businesses wanting to sell will likely result in a glut of businesses on the market in the coming years, which can further depress prices. And finally, most business owners wait too late to begin exit-planning, and delays can be costly in time and money. But with a well-planned strategy implemented sooner rather than later, some business owners can still realize their dream of life on a tropical beach.
According to a recent survey conducted by Orion Capital Group, LLC, 47 percent of middle market business owners are considering selling their businesses within three years, and, surprisingly, over 90 percent of those business owners have not initiated a planning process. By waiting for the last minute to make a decision to sell, these owners may be missing significant opportunities and not realizing the optimal value of the businesses they worked so hard to build.
What can the baby boomer business owner do? First and foremost, start early. Experts suggest that small firms get organized three to five years (some even say seven years) before they even start to think about transitioning out of their business. This long lead time is necessary for two primary reasons; first, prospective buyers have become more sophisticated and are looking for a long history of the business that includes good financial records and operating documentation; and second, it may take some time for the business owner to implement changes that can enhance the value of his or her business.
Business professionals such as valuation analysts, certified public accountants (including tax specialists), financial planners, and attorneys can orchestrate a comprehensive exit plan that will benefit the business owner in a number of ways, including minimizing taxes and legal fees related to the sale or transfer of a business to maximizing the price received for a business. For example, many buyers prefer that the owner remain with the business for a number of years after the sale in order to smooth the transition. If the owner waits until they want to walk away from the business without a transition period before they sell, this usually results in a lower sales price as the buyer perceives a greater risk without a transition period. Adequate planning that includes a transition period can eliminate the buyer’s risk and result in a greater price for the seller.
Well documented financial information is an important consideration in the planning process. Many small and middle-market businesses look upon formally prepared financial statements as an unnecessary expense, but buyers gain a greater sense of comfort in looking at a financial statement that has been audited or reviewed by a reputable accounting firm than one that has simply been printed off the business’ computer. And what goes in those financial statements is extremely important. If the owner is running a large amount of personal expenses through the business, this has a negative impact on operating profitability and cash flow, two key factors examined by a potential buyer.
Another consideration for the business owner is what my business is worth and what can I do to maximize that value before I sell? Many business owners have unrealistic expectations of the value of their business and this can make it difficult for the sale of the business. A valuation analyst can advise the business owner what his or her business is worth and, through their analysis, suggest ways in which that value can be increased.
Although this article addresses the issue of business owners and retirement, it should be noted that an exit-planning strategy should be developed by all business owners, whether facing retirement or not, in order to prepare for unexpected events, such as disability or even death. Exit-planning should be a normal part of the business planning process. Meet with Filler & Associates for more information.