Ep #037: Do I Need To Sell My Business To Retire?
Over 90% of business owners depend on the sale of their business to fund their retirement. It's a staggering statistic that highlights the significance of this issue. While owning a private business can be incredibly rewarding and fulfilling, it also presents unique challenges when converting that ownership into liquid assets for retirement.
In this episode we will discuss:
- How to determine if you need to sell your business to fund your retirement
- Understanding the math on how much you need to fund lifestyle expenses after exit
- How to fill the retirement income gap
- How an exit planning advisor can help prepare you for transition
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"Do I need to sell my business to retire? This is the question we will be discussing today and honestly, it’s not an easy question to answer because, at the end of the day, it depends. And in some cases, the answer may be “yes”, you do need to sell your business if you have any interest in stepping away and retiring. So today we’ll discuss how to think through this question and if your answer is a “yes” or a “no” what are some things to consider and do next."
When you need to sell your business to retire
"Let’s start with if your answer is a "yes, you need to sell your business to retire." In what situations would “yes” be your answer to this question?"
"A common situation is you haven’t saved and invested enough in a retirement plan or in assets outside of your business, so selling your business and getting something from it will be vital to funding the next chapter of your life. Maybe you don’t have a 401k or a SEP IRA or if you do, your not putting enough away. Now here lies another problem, statistics show that there is less than a 20% chance a business will sell when it goes to market, without any preparation or planning done in advance. This is stated by the Exit Planning Institute. So assuming you are going to get maximum value for your business without any preparation or planning will not do well for you. And at the end of the day, it comes down to knowing the math for your specific situation."
Understand the math
"And I can boil it down to these three variables. Which are all dollar values.
"How much have I accumulated this far in investable assets and or real estate?"
"How much is my business currently worth?"
"Compare those two numbers against how much money do I need that can pay me an income stream to support my desired lifestyle post-transition."
"When you take how much you’ve saved so far and the current value of your business and compare those two numbers to how much you need to have saved by your desired transition out of your business in most cases there is a very big gap. Especially when you factor in inflation, taxes, and fees on the business sale itself, the gap gets much larger."
How to fill the retirement income gap
"So there are really only two things you can do to fill the gap and it usually requires you to do a combination of both when you are in this situation."
"Number 1 - Start or increase how much you are saving and investing outside of the business. Start a retirement plan for your business if you don’t have one and if you do have one, increase your savings to it if your cash flow allows you to."
"Start implementing strategies to increase the overall value of your business."
"For many business owners, they will most likely need to do both of these things."
"So if this is you, speak with your Certified Financial Planner, and your CPA, and have them run the numbers on how much you need to save and put away to ensure you are on track. Get your personal financial planning taken care of first so you get clarity on where you currently stand and what you need to do to achieve your personal and financial goals for the future."
Working with an exit planning advisor
"At the same time, get with an exit planning advisor to evaluate the business. Until you get an open market valuation of your business and get a business assessment done, it’s very difficult to understand how much your business is worth. Through this process you will identify your strengths and weaknesses and can put an action plan in place to enhance the business value, increasing the likelihood of a potential transition down the road when you’re ready. I’ve talked about this process many times on the podcast, This is exit planning, when you align your personal financial goals and objectives with your business to get you where you want to be."
Not needing to sell your business to retire
"Ok so let’s flip it now, what would be a situation where someone doesn’t need to sell their business to retire? I can think of 1 or 2. The first thing that comes to mind in order for someone to answer the question this way is they must have done the math. So when they considered all of their savings and investments outside of the business, they know those assets can pay or will be able to pay in the future an income stream that will support their lifestyle without having to liquidate their business."
"Another situation could be someone has assets saved up outside of the business and they have also done work on their business to make it attractive to a buyer. Meaning they have a succession plan in place so if something happens to the owner, it can continue to grow. There have been enhancement initiatives implemented within the business to increase its enterprise value and they have a recent valuation done on the business. So they have done the exit planning work in advance. If done correctly, they should have an attractive business."
Doing the exit planning and financial planning
"So in summary in order to be confident that you don’t need to sell your business to retire, you must have done the financial planning and business planning up front. Many times this is not done, or the numbers that are used are guesses. Personal expenses are not getting tracked because many business owners funnel those personal expenses through the business to get the write-offs. And what happens is when you do the math you find out you are living on much more than you think, which once you exit and sell your business, those expenses now need to be funded by your own personal dollars. Hence why the gap between what you have and what you need tends to be very large."
"Ultimately preparing yourself and your business for a successful transition is hard work but critical to ensuring you can take care of yourself and your family and your employees. Determining your numbers on how much you have and what you will need for your financial future, will give you the roadmap on what you need to do. The last thing you want is to wait until you're 65, 70 years old to then figure out your numbers, realize you don’t have enough saved, find out your business isn’t worth as much as you thought, and now you have less time, energy and motivation to do the necessary work. Start your planning well in advance and position yourself to exit and retire from your business on your terms."