Many baby boomers are contemplating a business sale in the years ahead, but could be setting themselves up for failure in this consequential financial liquidity event. The mechanics of preparing a business for sale are critical, but small business owners often don’t put enough thought into it.
According to a recently released report from the Exit Planning Institute based on data through 2023, older business owners are the most likely to be contemplating a sale, with 58% of boomers saying they plan to sell their business within a five-year period.
It can be a good thing to be ready to part with a business. Many boomers have a work-until-death mentality, which can have disastrous consequences on finances and future lifestyle.
“Boomers are the worst at this because their business is so ingrained in their identity,” said Julie Keyes, a consultant who helps business owners prepare for transitions like a sale.
But there are many things business owners need to know to properly prepare for a sale, starting with an accurate assessment of value.
Be realistic about a company’s worth
Founders often think their company has a higher value than it actually does to an outside buyer.
Often that is because business owners talk to their CPA or attorney, or other owners who aren’t in the buying and selling market, and that leaves them with unrealistic expectations, according to Joe Strazzeri, co-founder and principal at The Founders Group, a provider of exit planning and business transition services. “Everyone thinks their baby is the prettiest baby on the planet,” he said.
He recommends that owners hire a valuation expert, and well before they are ready to sell. It’s a good idea to have a valuation conducted every one to two years to reflect changing market conditions. At the very least, owners should value the business about two years before they plan to sell, so they have time to implement necessary changes. “It sounds like a cost, but it’s an analysis tool to better run the company,” Strazzeri said.
One reason regularly updating a business’s valuation is important is because you never do know when an offer will be made. Even if an owner plans to retire in a set number of years, say five years, they need to be prepared for unsolicited offers at any time.
Private equity firms know that many business owners are unprepared, so they can often snatch up a company on the cheap, while owners get shortchanged because they haven’t done their homework, said Joe Seetoo, wealth advisor and partner at Morton Wealth, who works with business owners on exit planning strategies.
Do the math on retirement income early
It is also critical to have a comprehensive assessment of the business’s worth because it will have major implications for a boomer’s retirement planning and security. Most owners don’t know what they need for income in retirement on a net, after-tax basis. In the event an offer to buy the business is made, the owner may think it’s a good deal, but if they haven’t crunched the numbers, it could be inadequate.
Rick Krebs, a certified public accountant and mergers and acquisitions advisor at Business Sales Group, pointed to the recent example of a business owner in his early 70s who planned to retire from a landscaping and tree removal business in the next 12 months but never did the math on the company’s value. The owner was surprised to discover the business was worth far less than he had expected. Had the landscaper valued the business years earlier, he would have known its worth and been able to match that to retirement needs. Any gap in value versus retirement income would allow the owner to start making a plan to bridge it. But without that financial knowledge, the owner may have to work well into his 70s or 80s.
“He may never be able to retire because he didn’t know what the business was worth, and he didn’t do the valuation early enough to figure that out,” Krebs said.
Learn to delegate long before you sell if you want top dollar
What would happen if an owner were gone from the business for two weeks or a month?
That is a question that Keyes asks clients to answer. And if they answer that the business can’t go on for more than a week without them, that’s a problem that needs to be addressed, she said. Owners should be able to be gone for a month and have the business carry on. That’s one sign of a sellable business because it means the owner has decentralized themselves and has a viable business model with a team that can take charge and lead without the owner, Keyes said.
Owners who hang on too long — and who are unwilling to delegate — run the risk of having to make decisions based on unfortunate life circumstances such as an accident, sickness or death.
Keyes worked with a couple who owned a lucrative distribution business. The husband had a stroke in his mid-60s and could no longer work, so they had to sell the company. But the wife wasn’t involved in the business and didn’t know where any of the corporate documents were located. The husband, who had cognitive issues after the stroke, couldn’t remember the name of the bank where all the business documents were kept and their CPA didn’t have copies. Making matters worse, their financial advisor had never experienced a business transition before.
“They had no next-step plan. He was just going to keep working,” Keyes said.
Unfortunately, these types of issues are common, according to Keyes, and often owners end up selling for much less than they could have with appropriate planning. This failure to delegate can be a huge issue for aging business owners, and the problems can compound when retirement is forced.
Keyes gave the example of a couple in their late 60s that had to sell their bakery business because of the physical strain. They sold for less than they had hoped and were forced to supplement their retirement by working part-time. Had they valued the business years earlier, they could have strategized on how to drive more value from the business and worked on finding replacements and hiring people to work so they didn’t have to work as hard. “The business has to run better in your absence than it does in your presence. Businesses that are not as owner-dependent sell for higher multiples,” Keyes said.
If you’re planning to cash out in a few years, start the process now
Boomers shouldn’t try to sell the business on their own without having the support of experienced advisors, including a CPA, investment banker, financial advisor and attorney. If you’re thinking of selling in a few years, start building the team now, Seetoo said. It’s also important for owners to educate themselves on potential options for a sale.
Will the business stay in the family or will it be sold to a third party? Does the owner plan to retain partial ownership?
Even if owners have worked with an accountant or financial advisor for years, these professionals may not have the experience necessary to hand-hold them through a sale, so be prepared to bring in additional help. Many business owners are so wrapped up in their day-to-day operations that assembling a team is neglected, but it needs to be a priority, Keyes said.
Another often overlooked aspect of the sale process isn’t financial, but key to having a good life after cashing out of a business. Boomers need to start thinking about what they’ll do after they are no longer at the company’s helm. Will they start another business, volunteer, travel or continue to work part-time? Selling a business isn’t only about the dollar signs, and boomers could end up being bored or dissatisfied if they don’t map out a plan, according to Seetoo.
Ultimately, when an owner puts all the pieces of a strategic business sale plan in place ahead of time, it should “invigorate them,” Seetoo said.
