Many business owners never truly plan on retiring. Worse, many just assume their entrepreneurial journey will carry them through life indefinitely. Naturally, this leads to uncertainty and confusion when the day finally comes. While many entrepreneurs may eventually figure it out, understanding why you should prepare for life after business is critical. Doing so now can be a retirement game-changer.
Key Takeaways:
- Many business owners are hesitant to exit their business; however, it’s important to work with your financial planner to develop a clear business, personal, and financial plan for retirement.
- Half of all business exits are involuntary. To protect your business from and reduce the risk of unforeseen events, it’s critical to create contingency plans, including buy-sell agreements and succession strategies.
- Business owners should regularly assess their company’s value, understand valuation drivers, and reduce the business’s dependency on them so that the business can thrive without them.
Practice Makes Perfect
Like the rest of the general population, business owners are generally not the most prepared for life after business. Many have a natural hesitation to step back from the business and objectively diagnose the health of the company, and instead just grind away for years or decades. However, once an owner decides to take retirement more seriously, day-to-day actions could start to change. Regardless of company size, there are likely clear, noticeable improvements that remain unaddressed. As a result, many business owners are unprepared if/when the time comes to sell or move on.
For example, one of the main reasons why selling a business is so difficult is that the owners simply do not know how. There is a gap in expertise and knowledge that certain professionals need to come in and fill, which can feel overwhelming. Understanding who is involved is a good start, whether that be an advisor, attorney, accountant, M&A Broker, business coach, or others. Understanding the different exit options is another one. Having an eye on selling the business to a family member, ESOP, Management Buy-In, or external partner can shape the way you plan to exit. Then, roughly knowing how the sales process actually works is another educational milestone that reshapes the way you make business decisions.
To be adequately prepared as a business owner, there are three major sections to address. First, you must understand the business plan through and through. There must be a clear direction for the business that is not centered around you and your monthly income. Second, you need a personal plan. Identifying what your goals and desires are, outside of the business, must be addressed before retirement. Lastly, you need a robust financial plan to glue the other two together. At the end of the day, you need the finances to let your business support your life. The more strategic you can be with that, the more likely it will turn out in your favor.
You May Not Get To Choose
50% of all business transitions/exits/sales are involuntary, or happen despite the wishes of the owner. That means that even if you plan on never selling or retiring, you still need to do some level of exit planning. Business transitions due to death, disability, disagreement, divorce, or distress are all common involuntary exits for business owners. Especially for owners who view their business as their retirement, this could create tremendous amounts of risk that should be managed.
Buy-Sell Agreements are a good example of this. 16% of baby boomer owners have a written buy-sell agreement updated within the last 3 years. When partners or owners pass away, this can leave significant responsibilities for others to manage the aftermath. Depending on who inherits the company, whether a spouse or children, there can be significant challenges in valuing and cooperating with other business partners and beneficiaries. Generally, the last thing an owner wants is a disagreement between their business partner and their spouse over running the company once they are gone.
Having a contingency plan in place, including buy-sell agreements, can help reduce this risk for the business. Have the hard conversations now to determine how to value the company and how spouses/children can exit the company as easily as possible after you are gone. This applies to the work you do in the business as well. How dependent your business is on your skills and relationships could make or break the company if you were no longer there, and must be accounted for.
Not Focused on Value
At least 70% of owners are planning to exit within the next 10 years, in one form or another. In other words, most owners do care about the value of their company. Having the mental connection to see the life they want to live with the company’s enterprise value today can give people confidence in the companies they are building. Unfortunately, most owners have no idea how much their company is worth, and no way to know how to improve it.
Having a cadence to value the company every few years is a great start to understanding where you sit financially. After the first valuation, you will immediately begin to recognize how valuations work and what valuations (and eventually buyers) are interested in seeing. That could include obvious metrics like P&Ls and Balance Sheets, or the more nuanced areas of the business like add-backs or key-man risks.
One of the best ways to improve the value of the company is to systematically remove the owner from working in the business. Imagine a buyer coming in to buy your business. If the enterprise is run on 90% of your skills as a salesman/marketer/closer or 90% of your relationships or networks, how is a buyer going to replicate that once you are gone? As a result, your company is valued significantly lower, with a smaller multiple. Creating a business that works without you could provide significant value simply because it can run without you.
Exit Planning
Retiring as a business owner is a big deal. It is more than just telling HR you are done at the end of the year. There can be years’ worth of planning required to successfully transition the business. Most owners who have poured their time and energy into their business want to see it succeed, even if they were forced to leave for one reason or another. Therefore, it is critical to focus today on where the company is from a valuation perspective and what steps can be taken to improve that. This will allow you to understand what the next phase of life could look like, whether that is retiring into the sunset or into another business.
TC Falkner 