This message applies to all business owners: if you expect the sale of your business to fund all or part of your retirement, start planning now. I’ve been speaking and working with private business owners for over thirty years. Most owners have a dream of running their business for their working career, finding a buyer and then riding off into the sunset with no other planning.
Thinking your business is all it takes to get to retirement is usually a myth. Let’s look at some of the statistics around private businesses:
- Private businesses on average sell for a multiple of between 1.5 and 4 times their earnings before interest, taxes, depreciation & amortization (EBITDA).
- The average private business has an EBITDA of between 7% and 13%.
If we take a business that does $10,000,000 in sales and has an EBITDA of 10% we’ll see the following in a sale situation:
|EBITDA of 10%||$1,000,000|
|Sales price of 3.0 x EBITDA||$3,000,000|
|Taxes & expenses on sale (30%)||$900,000|
|Net proceeds from sale||$2,100,000|
|Annual income available at 4 %||$84,000|
$84,000 or less is the conundrum that many private business owners face when they think about selling their business. In this particular case the owner has been enjoying $1,000,000 of cash flow before interest, loan principal payments, capital investments and taxes. This will in most cases be significantly more than the $84,000 annual income the owner can get from selling their business and safely investing the proceeds. This is a business that is doing $10,000,000 in annual sales, which makes it one of the top 2.5% of the businesses in the country. What would happen with you and your business? Are you in the top 2.5%?
If not, you might want to consider some of the following strategies so that you can afford to leave your business:
Start and fund a qualified retirement plan
Qualified planning for future retirement is complicated. There is a great deal of customized design that can go into your plan. You will want to use a financial advisor who not only understands your investments, but more importantly is an expert at what type of plan and how the plan can be designed. In many cases you can tell your advisor how much money you want to save and they can put together a plan that fits those parameters. I’ve seen business owners who got a late start save as much as $100,000 per year in their plan.
Think about owning the real estate you operate your business in
If it’s possible for you to purchase the real estate you operate your business in you should strongly consider this option. Many business owners who own their own real estate will sell their business but keep the real estate and collect the rent. Like a qualified retirement plan, starting early with owning your real estate is important. Many owners will buy the real estate their business is in and then pay rent to themselves for fifteen years to pay off the mortgage. After the mortgage is paid off the rent starts flowing to the business owner. Sometimes the income from rent is more than the income from the principal on the sale of the business. Owning your own real estate makes leaving your business easier.
Before thinking about leaving your business do a financial plan
A sad experience is when a business owner sells their business, thinks they are going to retire and then finds four or five years later they have to go to work for someone else. These sellers often have seller’s remorse. They wish they didn’t sell their business after all. Doing a little financial planning before starting with a transfer strategy is always a good idea. The plan will tell you what your financial needs are before you start to plan the sale of your business.
In summary, start with the end in mind. Gather a good business broker like GMO, a respected financial planner and your accountant and plan for your future sale. Remember, the future belongs to those who plan for it.
Graham O’HehirGMO, Managing Director