Planning to sell your business and then retire?
In my experience, retirement of the seller is the most credible reason for buyers when considering to buy a business. Most buyers are not start-up entrepreneurs and want to buy an existing established business that has a proven sustainable cash flow history.
Irrespective of the other equally valid reasons to sell a business, a sustainable cash flow is what determines the value of any business for a buyer.
Unfortunately, many well established small businesses do not have the required financial, governance and operational disciplines in place. This can have a detrimental effect on the valuation of the company.
Get your house in order!
Just as you plan for your personal retirement by consulting with your financial planner over many years, it is wise to use advisors from early on to ensure that by the time you decide to sell, your business reflects the value that you have built over many years. Remember to obtain full market value you have to ensure your business is in top condition.
How do I do it?
Start planning your exit well in advance. Make it part of your continuity planning for the business.
Make use of trusted advisors e.g., accountant, business broker, financial planner and attorney. They will be able to guide you to resolve existing and possible future issues that might arise.
Your business value will largely depend on the assets of the business, future profits and the cash flow that it will generate.
Ensure that:
- fixed assets like land and buildings are well maintained
- all moveable assets for example vehicles and equipment are in an acceptable working order and condition
- accounts receivable is well managed within industry norms
- inventory levels reflect the operational requirements of the business
- the decisions to create any demonstrable intangible assets like goodwill are well documented
- risks are mitigated with appropriate risk insurance products
- surplus assets are sold for market related prices
The profitability and cash flow will determine what return buyers (and their funders) can expect to receive from acquiring the business.
Remember different from the person selling in this case due to retirement, most buyers will either have left previously salaried employment voluntary or involuntary or be an existing business owner/entrepreneur looking for merger or acquisitions opportunities.
Both of these groups of serious buyers will be in a financial position to fund part of the sale price and working capital of the business. However, they require a business that can provide a sustainable cash flow and hence return on their investment.
It is never too late – start today.
Take the following action steps to ensure that you are ready to retire successfully when you exit your business:
- Improve your business corporate governance
- Small business owners often think that their business is too small for corporate governance. The truth is that small businesses can benefit most from improved corporate governance. The simple first step is to introduce operational manuals to formalize rules, practices and processes. This will add substantial value when a new business owner must take over.
- Advisory boards can be used for small businesses as well. You do not need professional directors that might not be affordable. Make use of people in your business environment. Friends, family, accountant, financial advisor or family attorney each with their own skills can provide valuable insight and advice.
- Make sure your annual financial statements and taxes are up to date. Interim financial reports also provide additional comfort of prudent financial management of the business.
- Assess and value your assets. Take corrective steps to dispose, maintain or improve assets where required.
- Consider your financial liabilities given the time period that remain before you want to sell your business. Make sure you have sufficient risk mitigation and resources to service the obligations.
- Review your business performance. If your business is not profitable, liquid and solvent contact a turnaround or business rescue professional to arrest the decline and take corrective actions.
- Plan your exit from your business if possible 24 months in advance
- Appoint a business broker that can assist you with the valuation of your business and help you identify weaknesses and threats during the process
- Discuss the financial and legal implications with your accountant and attorney – especially tax planning is important to keep into consideration
- Discuss the impact on your personal income and estate with your financial planner
- Discuss your exit plan with your spouse and family
In closing
When you consider to sell your business due to retirement you work with a limited time frame. This makes it all the more important that you proactively manage the exit from your business.
Similar to an individual It is never too early to start preparing your business for retirement.
The biggest risk that the business owner face is that the business that they have worked so hard to build does not realise the expected market value.
Make that appointment with your advisors today to ensure that you still have the time to address the weaknesses in your business and mitigate the risks.
Coenraad van Beek