By Thomas Williams, CFP®, CPA, Partner, CEO, and Senior Wealth Advisor at Domani Wealth
Small businesses are part of the lifeblood of our regional economy. Many of our local leaders have built businesses from the ground up, creating a valuable product or service, opportunities to earn a livelihood for staff and becoming an important part of the community.
As those born in the late 1940s through mid-1960s (affectionately known as Baby Boomers) continue to reach their retirement years, many of our leaders throughout Berks County are contemplating the next steps that will lead them to retirement.
Thinking through retirement for a small business owner can prove to be difficult, given many owners have spent decades building and operating their business in good times and bad, and committing extraordinary amounts of time in the process. For many, business ownership has become their second identity, and it can become very difficult for an owner to imagine life without it. However, as the English poet Geoffrey Chaucer wrote, “Time and tide wait for no man.”
None of us can stop the passing of time and therefore should not delay doing important things, including planning for retirement.
Sufficient time is an ally of this planning process. Too often a business owner might find themselves waiting until age, medical issues or other factors practically force them into retirement, allowing little time for developing and implementing a well-thought-out plan for their retirement. Planning for something this important should not be encapsulated into a period of days or weeks, but rather, a much longer period of time.
A Day in the Life
An initial step for the business owner to consider is what does “retirement” really look like for him or her? Is it the transfer of day-to-day management responsibilities to another person or team of people while the business owner strategically overviews operations and retains ownership? Or is it an outright sale of the business with the current owner no longer involved? If there are next generation family members involved in the business, interested in greater management responsibilities, and at least partial ownership the answer could lie somewhere in between. Likewise, where there are multiple unrelated owners of the business the plan could look very differently.
In coordination with thinking about what retirement looks like, a financial model should be developed for the business owner, taking into consideration his or her assets and liabilities outside the business, the value of the business, other sources of cash flow not directly tied to the business such as Social Security or pensions, financial cash flow needs in retirement, taxes,
inflation, investment returns and other potential risks to a successful retirement. If this modeling is done in an in-depth manner, it can shed an objective light on what retirement CAN look like for any given business owner. For many, an outright sale is critical to the retiring business owner’s financial security and that of his or her family throughout the retirement years.
The Best Team
Similar to the manner in which a business owner would seek to surround themselves with the best employees to help run the business, so too should the business owner surround themselves with a team of competent professionals that can provide the necessary guidance in developing a well-thought-out retirement plan. This team, usually consisting of a CERTIFIED FINANCIAL PLANNER™ professional, an accountant, an attorney and an insurance specialist, can do a reasonable amount of the heavy lifting necessary to put various planning models together for the business owner’s consideration. When the decision is made that the most prudent exit strategy for the business owner is to sell the business, particularly to an outside party, there often may be another critical seat at the advisory team table to be filled, either by a qualified business broker or an investment banker.
A Sale Process
The reality is that few business owners are familiar with a sale process, which can maximize the after-tax proceeds from the sale of the business. Further, a competent business broker or investment banker can discuss with the owner ways to best position the business for sale or whether a liquidation of the business is the preferred option. They can also discuss what realistic valuations might be for the business as well as their approach to reach either strategic or financial buyers (or both) to create as many qualified buyers as possible for the business to maximize value.
Typically, investment bankers require the business to be of a certain minimum size for them to become involved in the process. Often, the minimum is defined as the business generating at least $2 million annually of EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization). However, smaller businesses that do not meet the investment bankers’ minimum can still find a qualified, competent business broker to help navigate a sale. Clearly a business owner should gather references on any investment banking firm or business broker they are contemplating using, given that the business is frequently one of the largest if not the largest asset of the business owner.
It is not uncommon when a business owner decides to sell a profitable business that multiple buyers will be interested. In this case, the owner’s advisory team can help the business owner evaluate all offers. Often the terms of the offer are as important as the price being offered. For example, a bid with a higher price but requiring the owner to take back part of the price in return for a subordinated note payable over five or seven years may not be as appealing as an
all-cash offer for a somewhat lower price based on the credit risk the business owner would assume by holding a note from the buyer.
Deal structure is also critical in determining the after-tax proceeds the owner will receive. It’s not uncommon for deals to include various allocations of the total price, including dollars allocated for assets or stock, dollars allocated to a covenant not to complete, and dollars allocated to a consulting agreement to help with the ownership transition. Each of these may vary with respect to their taxability and, as a result, often are significant points of negotiation in structuring the sale of a business.
Retirement planning by business owners is critical so they can be prepared, when the time comes, to be able to reasonably choose what they want their retirement to look like. This planning takes discipline to do on an ongoing basis and requires time to implement, so the sooner it is started the better. The commitment by the business owner to develop a comprehensive retirement strategy can result in an exceptional return on that investment.