Will you be able to retire? More to the point, do you have an exit strategy so that when you are ready to get out, you have someone to take your place?
To borrow a common lament sometimes heard from people who buy boats and sports car, the two happiest days in a business owner’s life are the day he starts it and the day he sells it.
Unfortunately, few business owners give much thought to what they will do when the time comes to pack it in. The real problem is that most SBOs have almost no retirement resources set aside; many have no successors waiting in the wings; and few have a clue how to sell their companies. As a result, a surprising number of business owners keep working long after the thrill is gone, darn near give the place away for next to nothing, or – worst of all — lock the door and just walk away.
Of course, contrary to that great myth about business owners being awash in wealth, most of us can’t afford to retire. According to a 2007 report from the National Association for the Self-Employed, more than 75% of micro-business owners (those with fewer than 10 employees) are relying on Social Security as their primary retirement income. That’s a cheerful thought, especially when you consider that your average Social Security retirement check comes to just over a $1,000 a month. So, what can you do?
If you have a buyer or family member ready to step in, get everything in writing. You do not want to end up in the situation of being ready to retire only to discover that, suddenly, that long-time, loyal employee decides it’s time to renegotiate the terms of buying your business.
Get your attorney involved to begin hammering out details. When you are ready to commit, one of the best ways to guarantee that everything works out as planned is to draft a legally binding buy-sell agreement. The buy-sell agreement designates who buys, when, and for how much. It should also include a funding mechanism — cash value life insurance and/or a sinking fund.
Realistically, however, there is usually no buyer waiting, unless yours is a family business. So, typically, the owner makes up a price (that generally bears no relation to reality) and runs a classified ad in the local newspaper. Or, if it is a retail business, the owner puts a sign in the front window (which, by the way, can do more harm than good, by driving away customers who see no future in working with a lame-duck operation). This is generally a ready-made formula for disaster. When prospects show up at all, they are too often inexperienced, with no financing, and no idea what they should pay for the business. In the end, after years of frustration, the owner just shuts down and walks away after having wasted a lot of time, money and effort.
Some business owners contact brokers who specialize in matching business owners with potential buyers, very much the way a real estate broker works. The right broker can help you…
- assess your objectives and needs;
- create a business analysis and valuation package;
- develop a marketing strategy;
- pre-qualify prospective buyers and assess financial qualifications; and
- coordinate closing and financing arrangements.
In the right situation, a business broker can help bring together a motivated seller and a qualified buyer in a win-win deal. Plus, there are few, if any, costs involved until an actual sale takes place.
Smart business owners also establish a retirement plan, whether it is a 401(k), a SEP (Simplified Employee Pension), or an IRA. Do this regardless of your other plans, since it can provide retirement security even if something goes wrong with a buy-sell or other option.
Reminder: Start today. Whether you just opened your business last Tuesday or have been at it for 40 years, an effective exit strategy takes time. So, start today to help assure that you will be able to retire when you are ready…and don’t end up living on Social Security during what should be your Golden Years.
Work hard. Make money. Have fun.
The Freestyle Entrepreneur
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