Retirement eventually comes to all business owners. After investing their time and resources in exploring business opportunities, it’s time to enjoy the dividends of all the hard work and begin a new adventure – exploring life!
Maybe you have a bucket list to cross out or are planning to create one. You might have decided to pull the trigger and go for the sailboat you’ve had your eyes on for the past few years.
Planning to do what comes after entrepreneurship is fun. But before you can sail off into the sunset, there’s still one matter that you have to settle.
Should you close or sell your business before retiring?
To Close Or To Sell – Which Option Is Better For You?
It might seem that selling your business is the better option because of the money you’ll make from the sale.
However, it doesn’t mean that once you sell, you can 100% move away from the business when Retirement Day#1 rolls in.
The new business owner might want you to stay on board to guide him and the incoming management team while they’re learning the ropes. The conditions of the sale might require you to be available for consultation at least for the first quarter of operations.
Then, there’s that nagging concern in the back of your mind about the business brand. If the new owners decide to take the business in another direction and if it doesn’t work, years spent building the brand might go to waste.
Plus, all the work that goes into selling a business:
- Reviewing the financials
- Calculating the selling price
- Networking for potential buyers
- Negotiating with the potential buyer
- Paying off all tax obligations
- Finalizing the conditions of the sale
If your business is successful, you can look forward to having a good amount of money to fund your retirement to-do list.
Just keep in mind that selling a business doesn’t happen overnight.
How To Sell Your Business
Here’s a scenario that you should think about before selling your business.
It’s the month of April and you want to sell your business by May because you’ve booked a 2-week stay at a villa in Florence, Italy.
Guess what? It might take more than one month to sell your business.
Potential buyers won’t just pull out cash from a duffel bag or run a wire transfer to your bank account from their mobile phone once you agree on the sale price.
They’ll perform due diligence on you and your business. Likewise, they’re also looking for business opportunities elsewhere.
It might take months or even years to sell a business.
Thus, if you’re thinking about selling your business, understand that it might delay your retirement plans.
Stay on the course on the retirement highway by following our 4 tips on how to sell your business.
1. Prepare the Business Financials
As the saying goes, “The numbers don’t lie.”
The first step you take when selling your business is to accommodate the first step taken by prospective buyers.
Prepare the financial statements that account for the performance of your business for the last 3 years. These statements include the following:
- Financial statements for the last 3 years – Balance sheet and profit/loss statements
- Bank Certification
- Tax Returns for the last 3 years
- List of suppliers and vendors
- Lease contract
- List of business contacts
The financials will give the prospective buyer an idea of how your business has been performing and if it’s worth the investment. The prospective buyer will review your financials and run his own studies or projections.
You should expect the buyer or his representative, usually an accountant, to interview you about operations, the systems in place, current pain points, prevailing challenges as well as your expectations for its future.
Don’t be afraid to discuss areas of your business that might be perceived as red flags. It’s better to be transparent and honest than to hide matters that will manifest themselves in the months or years ahead.
If your business is dealing with some issues, assure the buyer that you’ll remain on board until such time that these matters are resolved.
2. Have Your Business Appraised
Once you have the financials ready, sit down with your accountant and appraise your business.
How much is your business worth? What would be a fair price to offer prospective buyers?
An experienced accountant can help you determine the true value of your business using a number of methods:
- Summarize its Total Assets – Add up all of the assets of your business including inventory and equipment. Deduct any debts or liabilities from the total amount of your business assets.
- Amount of Revenue Generated – How much revenue does your business generate per year? Determine the performance over the last 3 years in order to arrive at a realistic projected per annum growth of sales.
- Price-to-Earnings Ratio – Let’s assume that you’ve projected annual sales to be US$500,000. If the P/E ratio is 15, then your business could be valued at US$7.5 Million.
- Discounted Cash Flow – You can find a calculator to determine the Net Present Value (NPV) of your business.
An accountant would do this by studying your business’ annual cash flow as a basis for making projections for the future. Then, he discounts the future value to the present in order to arrive at the NPV.
You might also want to consider hiring the services of a business appraiser. The advantage of this approach is that the valuation of your business will be certified by an experienced professional.
In some cases, professional certification might carry more weight with prospective buyers than valuation done by your accountant because there won’t be a perceived conflict of interest.
3. Finding a Buyer – Broker or For Sale By Owner?
Now that you have the financials in order and have a sale price in mind, the next order of business is to find potential buyers. You can hire the services of a broker or go FSBO – For Sale By Owner.
Truthfully, FSBO is a term used in real estate. In the last few years, more property owners have eschewed brokers and decided to sell their properties on their own to save up on commission fees.
Similar to selling real estate, business owners hire brokers because they want to take advantage of their large network of buyers. Brokers make it a point to continually build up their leads list so they won’t run out of prospects.
However, hiring a broker comes at a cost. Depending on the type of business and/or its valuation, a broker might charge you 3% to 5% of the final selling price.
In addition, the broker might charge you for the cost of marketing and other related expenses.
Going FSBO saves you from paying out commissions, but finding potential buyers is time-consuming. Not to mention that you have to qualify these potential buyers so that you won’t waste your time on them.
The process of finding buyers can be a long and arduous one. You can’t and shouldn’t sell to the first buyer who comes along and expresses interest in buying your business.
At the very least, try to come up with 3 interested buyers. Get to know them. Review and compare their offers. Sit down with each one of them and iron out the details of their offer as neatly as possible.
Each potential buyer will present conditions to the sale that might impact your price and your official date of retirement.
As an example, you might have a good buyer but he’s not in a position to make an outright cash payment for your business. In order to buy your business, he has to qualify for a loan.
It’s also possible that the buyer of your business will ask for payment terms because he can’t cover the full cost and plans to cover the balance from future sales.
- First payment – 50% of the finalized sales price
- Second payment – 25% of the balance after 6 months
- Third payment – 25% of the balance by year’s end.
For these reasons, it might be worthwhile delegating the task of finding a buyer to an experienced broker. You will save more time and possibly lower the risk of making costly mistakes. Besides, you can always adjust the sale price to dampen the effect of the broker’s commission.
4. Handling the Proceeds
The process doesn’t end once the business is sold. There might be tax implications as the sales proceeds will have an effect on your income for the year. Consult with your accountant or a tax expert to clear out any obligations arising from the sale of the business.
If you have outstanding personal debts, you might want to use part of the proceeds to settle these obligations.
Lastly, even if you’re retired, you should continue to focus on strategies that can help build your personal wealth. Talk to an experienced fund manager and find out the best placements for the sales proceeds.
If you’re not getting solid offers from potential buyers of your business, it might be better to just close it down.
After all, the option to sell it in the future will always be there, especially if the brand has a good reputation and you were able to successfully build a strong market following.
You can take a 2-week vacation in Florence, Italy and when you come back, try to sell your business again.
The bottom line is to plan for your retirement years in advance. Figure out the best age for you to retire then start the process of selling your business 1-2 years out.
This will give you enough time to prepare your financials, appraise your business, hire a broker to provide a list of qualified buyers, and review and negotiate offers so you can arrive at the best deal for your business.
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