If You Plan to Fund Your Retirement by Selling Your Business, This Is What You Need to Know
Valuing a business the day you decide to sell is like planning your retirement the day you decide to retire -- you may be left out in the cold.
Ask entrepreneurs about their retirement plan and it is likely their answer will be, “My business is my retirement plan”. According to CNBC and the Financial Planning Association, 78 percent of small-business owners plan to sell their company to fund 60 percent to 100 percent of their retirement, yet very few are aware of its true value. Without this knowledge, it will be difficult for these entrepreneurs to ensure they receive the correct level of compensation for the company they’ve worked so hard to build.
Planning for retirement is a long-term commitment. However, many small-business owners don’t save for retirement because their priority lies in putting their earnings back into the business to keep it growing rather than paying themselves a salary. In fact, a recent survey by Manta, a community of small businesses, revealed that almost 60 percent of U.S. small businesses hope to retire before age 65, yet 34 percent do not currently have a retirement savings plan in place.
Despite the huge number of entrepreneurs who plan to fund their retirement by selling their business, according to the U.S. Trust, 72 percent of business owners don’t have an exit plan. When planning for retirement, entrepreneurs will often take one of two routes: They will transfer their business to their children for future wealth or they will sell it off in return for cash.
In either case, knowing the value of the business will strengthen the business owners' hand in the negotiation process by allowing them to identify potential buyers, negotiate more effectively and increase the chances of realising the maximum value for the business on sale. Valuation is not only crucial for a successful exit, but will enable entrepreneurs to make realistic, well-informed and profitable decisions during every stage in the life cycle of the business.
Being unaware of your business’s value may result in missed opportunities: If you knew your business was worth enough to fund your retirement, would you choose to spend more years working or would you take early retirement? You may opt to stay on, but that knowledge would provide you the freedom to make an informed choice. If you know your business’s value, you may choose to sell and receive a considerable financial payoff but if you are unaware, over time its value may decline and the possibility of a big financial pay-out could fall out of reach.
For small-business owners, engaging in the process of discovering their business valuation is typically put off because it is often perceived as an expensive and time-consuming process, which some find invasive and uncomfortable. However, advancements in technology have now made big data readily available, allowing business owners to obtain accurate and reliable online valuations without the intrusion of a traditional valuation, giving them the freedom to make decisions that they otherwise would have gone into very ill-informed.
Small-business owners would do well to keep their retirement top of mind and check in on their progress regularly to ensure that they are taking adequate time to invest in their future. Entrepreneurs' mentality usually focuses on generating future revenue for their business but a few hours a week will help to keep their future needs a top priority. Valuing a business the day you decide to sell is like planning your retirement the day you decide to retire -- you may be left out in the cold.