Following a close third is exiting a business for the purpose of the business owner’s retirement. There are just over 12 million baby-boomer-owned businesses in the U.S. Estimates are that just over two-thirds of those boomer business owners have no plan to capture their wealth from the business upon retirement.
So that means that when these small business owners reach retirement, if they do not have an exit plan, they will lose the wealth they have created in the business. The vast majority of boomer business owners want to sell their businesses and retire in the next 15 years.
As a result, there will be more businesses for sale than there are buyers to buy them.
Consequently, the forecast is that 75 percent of boomer business exits will result in the closure of millions of businesses resulting in trillions of dollars in losses — all due to the failure to plan. Food for thought: boomers typically have anywhere between 65 percent and 85 percent of their personal wealth tied up in the business.
The popular exit strategy by a business owner involves a direct sale to another party with the business owner maintaining little or no ties to the business. There may be some owner financing that the business owner must do to facilitate the sale, especially if the business has a larger amount of “blue sky” equity, or the business sale price exceeds that which can be supported (such as by hard assets of the business). Some business owners find that they cannot sell the business due to economic factors or buyer issues and therefore have to look at strategies to have a person manage the operation during their retirement until a buyer can be found.
Regardless of the exit strategy scenario, there are three key steps that the boomer business owner can take to avoid being one of the failure statistics.
1. Have an exit plan developed far in advance of the anticipated exit date. Procrastination in business is rarely, if ever, a wise move. Exit strategy development is definitely not a last minute exercise. The goal of early planning is to ensure that the business owner leaves on his or her own terms, and not terms dictated by the circumstance or the buyer.
2. The plan must ensure that both the business and the owner survive financially. From the business owner’s perspective, it does no good to plan the sale only to lose the investment. This is especially true if he or she is partially or fully funding sale of the business. Losing the investment can be due to many reasons including a failed hand off or transfer of the business, and poor new management of the business.
If the previous business owner brought special education or experience to the table that made the operation successful, the new business owner must hire a person or people to replace that ability to continue the ongoing success. The business cannot survive financially if the operations lock up due to unforeseen or unplanned changes.
3. The exit plan must be adequately funded. This tends to be one of the major reasons the sale of a business fails. In some cases, the seller expects more from the buyer than the business can evidence in terms of value.
The seller may then agree to finance a larger portion of the deal, which causes debt service (and cash flow) of the business to be negatively impacted. In addition, bank financing should be sufficient to both fund the sale as well as plan for ongoing funding needs of the business. This is especially the case when the previous and new owners are not fully aware of the cash flow needs of the business and fail to plan through operating lines of credit or other sources to meet cyclical, seasonal or unexpected cash demands.
To address these, as well as other must do’s in exiting a business, special care should be given to:
1. Develop financial models to establish the financial plan to ensure both the business and the owner survive financially.
2. Determine a business planning path to ensure maximum (and realistic) valuation of the business as the retirement and exit time approaches.
3. Preparing due diligence paperwork and bring on key people (attorneys, bankers, accountants, insurance agents).
4. Develop the ideal financing/funding plan with which both the seller and the buyer can agree.
5. Execute many reviews and assessments to ensure the plan is feasible, legal and desirable.
Just as in starting or expanding a business, selling a business without a plan is a plan to fail.
Chris Wooldridge is district director of the Murray State University Small Business Development Center, a member of the Kentucky SBDC network. The center provides high quality, in depth and hands on planning, consulting and training. Call 270-809-2856 for more information or to schedule an appointment. On the Web: ksbdc.org.