Three Reasons Business Owners
Can't Retire When They Want
by
Do you own your own
business or, in reality, does it own you?
Ah, retirement, that
time in the sunset of your life when you can do
whatever you want, whenever you feel like it.
You receive checks in the mail every month
from all of your previous hard work. Regrettably,
this dream is a fleeting one for many business
owners for several reasons.
Here are the top three
reasons you may be disappointed and advice on how
to address the issues:
First, you need to
retire on the job. Sounds crazy, but it's true.
We've advised dozens of
firms on M&A transactions over the last decade
and invariably one of the first questions a savvy
buyer asks the business seller is, "How much
vacation time do you take each year?” The buyer
doesn't care about your vacations, he is gauging
your confidence in the depth of your management
team.
Can the business run
smoothly without you?
Many business owners
cannot or will not forgo taking home the profit of
their business to invest in the management depth of
their organization. While it is true that your
company gets valued by buyers based on your trailing
12 months' earnings, it is equally true that your
company is more valuable if it less dependent on
you.
Bite the bullet and
invest in others.
Second, the monthly
income you will receive today from investing the
proceeds from your business sale, is lower than you
might expect. With
interest rates close to historical lows, you
will need more investment principal from the sale of
your business in order to generate enough income to
replace the income you took out of the business.
Although interest rates
are rising, it will likely be a number of years
before we will see 8-10 percent rates on
government-backed bonds. As a result, either your
business has to be worth more or your income
expectations have to be lower. Don't assume that
your business today is worth enough to replace your
current income levels. It rarely is.
And remember, tax and re-investment planning
vital to your retirement plans.
Third, and probably most significant, is the
baby boom.
Many of those boomers
own businesses.
They are looking to retire in the same
timeframe as you are. With so many sellers hitting
the exit doors, the capital providers (buyers) can
be more selective about the businesses they buy and
how much they are willing to pay. We
predict that the average multiple of earnings paid
for closely held businesses will reduce by “1X”
in the next decade due to this sea-change
demographic effect.
So, if you don't
address the value drivers of your business, through
no fault of your own, your business' value will
diminish in the next decade. We hope we are wrong,
but we think not.
If you accept our
version of reality, "What the heck can I do
about it?”, you might ask. Obviously, here's where
I could give a commercial, but will restrain myself
and stick to fundamentals.
One buyer is a garage
sale and two buyers is an auction. The most
important thing you can do is create and manage a
process that fosters multiple bids for your company.
Above all else, you must ensure this happens. We've
seen too many "deer-in-the-headlights"
business owners get seduced by a single buyer.
With no alternatives, they sell their
businesses for less than they could have. More value
gets added to the transaction away from the
negotiation table than at it. The average annual
return on investment which private equity groups
have realized by buying companies like yours,
growing them and re-selling them over the last 20
years is a staggering 27 percent. Much of that
return is based on buying your business for less
than it's worth.
Face it. You're
out-gunned when dealing with a larger acquirer.
Get help. Get leverage
on them through multiple bidders in a structured
format.
Quality of earnings
correlate to higher values for your business. If
more than 20 percent of your revenue comes from one
customer, fix that. Buyers will place more value on
a company whose future earnings are more likely to
continue than one with an uncertain earnings future.
Many things can be done to improve the quality of
your earnings. What's nice is that every dollar
spent in this area will return $6 to $8 dollars in
sale proceeds.
Assemble your team now.
You will need a CPA, an investment advisor
and a middle-market focused investment banker.
Your team will help you assess the
current realities of your business future
variables (tax rates, re-investment returns given
your risk profile and business valuation scenarios),
as well as what you will need in income for
retirement. Your team should develop a road map to
retirement for you with action items to expedite the
process.
Brandt Brereton is managing director of Brereton, Hanley & Co. Inc., a private investment banking firm based in Campbell. Reach him at 408-938-9255.