If you are like most small-business owners, you spend much more of your time on the day-to-day needs of your business and relatively little on positioning it for the future. As a result of focusing on the here and now, your business might not be in the best of shape to support your retirement.?Making this situation even more of a concern ”“ especially if you are over 40 ”“ are these two projections.
They may seem questionable at a time when we have a high unemployment rate, but they make sense if you do the math, as these two organizations have done:
By 2018 the U.S. will have a shortage of 10 million in the work force, according to Barry Bluestone, dean of the School of Public Policy and Urban Affairs at Northeastern University.
The Department of Labor estimates that in the same eight- to 10-year period, 6 million small businesses ”“ about 60 percent of the total in the nation ”“ will be for sale as baby boomers look to cash out.
Put these two predictions together and the message is loud and clear: When you are ready to retire, you might have to keep working because you won”™t be able to exit your business. Or you might get far less for it than if you had prepared it for sale. This could be a serious problem affecting the quality of your retirement. So if you own a small business and expect to sell it, or create a succession plan for it, the time to start developing an exit strategy is right now.
Profits, plans and priorities
Either you need to generate as much profit as possible before you turn out the lights and lock the doors, or you”™ve got to start planning to bring someone on board who can take the business over and either buy it from you or run it for you. And if Bluestone is right, even though we have high unemployment now, the people you need to put in place to make a succession strategy a reality will be in short supply in the next 10 years. So you”™ve got to start preparing your business so you can afford to bring in the right people before the demand starts to outstrip the supply of capable employees. But whether you sell to an outsider or insider, you have to start planning today because these things won”™t happen by themselves.
Consider this: Although there is no strict formula, businesses typically sell for about three to five times annual revenues. Let”™s compare two businesses that sell the same product or service. A venture capital firm decides it wants to get into that industry, so it evaluates both businesses to decide which to buy:
Business A is a sole-proprietorship that”™s generating $5 million in revenue, but that revenue is generated solely by the business owner.
Business B is a sole-proprietorship that”™s generating $3 million in revenue, but the owner brought in key staff so it could be shown that a profitable business would exist after she left.
Which one do you think the venture capitalist is going to buy?
Probably not Business A. Who is going to spend $15 million to $25 million to buy a business knowing that the day the owner leaves, most of the business is likely to go out the door with him or her? All other things being equal, Business B is by far the better purchase for $9 million. With a competent team in place, Business B is likely to have a far higher customer retention rate after the sale and greater likelihood of future growth.
If you start planning your exit strategy 10 years from now ”“ with fewer people in the work force and 60 percent of all small businesses up for sale ”“ how likely are you to get the price you want for your business? Even worse, will you be able to sell your business at all, because with 6 million businesses on the block, there”™s no question that supply is going to outstrip demand.
So what happens to you if you are the owner of Business A? You may have to keep working whether you want to or not. And if you haven”™t put money aside for your retirement, you may have to keep on working for as long as you can.
If you want to minimize the likelihood of having to work indefinitely during the years when you”™d rather be enjoying a comfortable retirement, you need to plan and implement a business succession or exit strategy right away.
Josh Slavitt is a certified business coach with Westport-based ActionCOACH of Connecticut, a worldwide business coaching network. Reach him at joshslavitt@actioncoachnow.net.
