Article Summary of What Options Do You Have When Selling Your Business For Retirement:
- Problems Facing Retiring Business Owners
- Options For Selling Your Business For Retirement
What Options Do You Have When Selling Your Business For Retirement?
If you are a ‘baby boomer’ entrepreneur interested in selling your business for retirement, you’re not alone.
According to the U.S. Census Bureau, boomers own about two-thirds of business with employees. This amounts to approximately 4 million businesses.
If an equal number of retiring business owners try selling their businesses, then 210,000 businesses would hit the market each year by 2030.
The problem? In 2017, only 7,842 small businesses were sold.
The potential ‘silver tsunami‘ of small businesses hitting the market could make it extremely difficult to sell a business quickly and for a fair price in the coming years.
If you’re counting on selling your business for retirement, what are you supposed to do?
Problems Facing Retiring Business Owners
70% of boomers now find themselves in a tough spot when it comes to selling their business. It’s tough because while they’ve focused on creating & running their business, they’ve neglected planning for succession or a sale.
Ideally, Gen Xers and millennials would be lining up to purchase these companies. Unfortunately, that isn’t the case. The scarcity of potential buyers is a big problem.
And if the economy takes a downward turn in the near future, how will your business be valued?
As if a large number of potential businesses about to hit the market wasn’t problem enough, here are 2 other common problems many boomers face when trying to sell a business:
- The company is too owner dependent, meaning that the owner is too valuable among the many areas of business operations and client relationships.
- The company is too dependent on just 1 or 2 clients, meaning if just one of them leave, the business loses considerable value.
All of these problems can make selling your business fast and for a fair price very difficult.
This problem facing retirees is also a problem for American communities as they depend on small business owners to provide jobs and create locally-rooted wealth.
What Are Options For Selling Your Business For Retirement?
If you’re a retiree looking to sell your business before the silver tsunami hits or the economy heads into a recession, what are your options? Here are some helpful tips for selling your business.
1. Use a Sales Broker?
Let’s face it, business owners are experts in running a business, not selling a business. Therefore, it makes sense to hire a professional to focus on an area that is not a strength of yours, right?
Using a sales broker when selling your business may seem like a simple & logical solution, but here’s the reality about using these brokerage sites: 90% of businesses put on the market don’t sell.
The biggest reason I’ve found that brokers’ don’t work well is that they set an unrealistic expectation of your company’s value. This is because the broker, who works off a commission (typically 10% of your proceeds), has their own best interests at heart, not yours. Their best interest is getting as big an upfront sale as possible, when, in reality, a different strategy (such as a deferred payment) may meet your needs better in retirement.
Also, in reality, many of the brokers aren’t very good at what they do and that you, as a savvy business owner, can sell a business better by yourself.
2. Pass On To Children?
When retiring, we tend to think about legacy and the thought of passing a lifetime of work down to future generations sounds great.
In reality, only about 10% of businesses actually survive to the 3rd generation.
The biggest reason for failure is the lack of interest in the family business among the family members – they do it not because they want the business, but because they think it’s expected of them. As you can imagine, this results in a culture of apathy and disengagement.
3. Sell To Employees?
Selling to an employee isn’t an option for every business owner. Sometimes, healthy businesses simply don’t have any employees who are willing or capable of taking over. While they may be a sharp employee, they may not be management or ownership material.
In other cases, financial considerations and/or the seller’s exit plans make an employee-based sale a no-go.
Some common problems when selling to an employee include:
- The employee thinks they deserve a special deal less than fair market value
- They can’t get financing
- They do the math and realize they’ll make less cash as an owner than an employee
- Other employees may get jealous and leave
Selling to an employee is a tough decision because, as an owner looking to create his or her legacy, you want the business to survive and you want to know that your employees will still continue to earn a living.
4. Selling Your Business Yourself?
As much as you may want to leave your business to your children or sell to an employee, the best idea may be to actually sell to an experienced business buyer, move on, and enjoy retirement!
Perhaps the 2 biggest reasons to sell to an experienced business buyer directly:
- Creativity in offer
- Experienced in growing businesses
A broker is going to create a deal that yields the broker the best commission. Typically, this means trying to sell the business for the highest up-front cost to maximize commissions.
However, a high sales price may make it difficult to sell (a big reason why 90% of businesses don’t sell thru brokers) and may, in the long term, be detrimental for the company & employees.
Also, a one-time lump sum payment may not be in your best interest either. Some small business owners may actually want to sell their business as a way to fund their retirement, and a high front end may not be as attractive to you as installment payments.
Flexibility in buying and experience in running multiple companies in different industries can put boomers in a good situation to sell their business and live well in retirement.
Summary of Selling Your Business For Retirement
Selling your business for retirement is tough. The business was built and run by you, you take pride in its success, and you have established great relationships with your clients, vendors, and employees that you don’t want to see dissolve. While you want to retire and earn revenue from the deal, the last thing you want to do is mess it up for those who’ve been with you for years.
Using a broker typically has a very low success rate. Selling to family members is rarely a good option as they may not truly know or understand the business and will simply go thru the motions out of a sense of duty rather than pride or desire. Unless you have a true ‘diamond in the rough’ employee, you may be putting a good worker in the position of ownership who may not make good decisions that will cost the business in the future.
If getting a fair price for your business with the comfort of knowing that your company will be in good hands for the long term is important to you, then selling your business to an experienced business buyer may be your best option.