Creating a retirement lifestyle should be about your goals, dreams, and plans for what you want to accomplish.
Building a successful business can take decades. While working to grow, it's common to use all available assets above the salary you pay yourself to fund future expansion. Where does that leave you on the retirement side of things? For most business owners, the retirement plan is some form of exit and monetization of your investment.
As you get close to a transition, valuing the business is paramount. The value comes first, and then the sale, and only then do many business owners think about how the sale proceeds will fund retirement.
There's a better way. Start with the amount of money you need to live the retired life you want. That’s your benchmark of the value you want to get for your business. Then work from there to create the value you need.
A Different Valuation Metric: What Do You Need to Retire?
Creating a retirement lifestyle should be about your goals, dreams, and plans for what you want to accomplish in the last several decades of your life. It shouldn't be about plugging a number into a glorified spreadsheet and then eking a life out of whatever income pops out.
Think of it in three stages:
What's most important to you in the early stages of retirement? Travel? Family? Starting another business? How much will that cost?
As you age, what do you want your life to look like? Where will you live? How will you spend your time? Do you want to be able to help children and grandchildren? Do you want to devote time to philanthropy? What level of income do you need in these years?
What will your legacy be? How will you fund it?
Once you've thought through what your retirement looks like, you can begin to think about the amount of money you'll need to make that happen.
As you begin transitioning your business to an exit, you'll want to get a comprehensive, accurate valuation. Bridging gaps between what your business is worth and what you need should be your focus. It should guide your timeline and business investment decisions for several years before getting to a liquidation event.
Increasing Your Value
You’ve likely been focused on the long-term growth of your business and are used to planning and taking steps to keep a consistent upward trajectory in place, even if it’s not profitable right away. Value is a different mindset. You want to position your business to be the most attractive to a buyer, which means focusing on profits and getting everything else in place and ship-shape.
Increasing value breaks down to making improvements across several essential functions:
Improve cash flow – lease instead of buy, reduce expenditures
Increase profitability – improve margins from both cost and revenue
Lower your risk – diversify revenue streams and create recurring revenue streams
Streamline operations – inventory management, payroll control, etc.
Attract and retain high-quality talent – qualified retirement plans, cash balance plans, stock plans
Build or refresh your sales/marketing process
Get your books in perfect shape
If you’re wondering how you’re supposed to do all that while running the business, that’s where it gets interesting. You're not. The sales process has a very truncated timeline. The value of bringing in outside expertise is correspondingly greater. Even if you could do all those things yourself, you can't do them all at the same time.
Creating the Team You Need
The best approach to getting ready for a sale is to create a team that can work with you to determine what needs to be done systematically, build a schedule to do it, and identify the right sources. Whether outsourcing or hiring in-house, you'll need to create a working group of consultants – business, marketing, pension, etc. – along with investment bankers, CPAs for the company and those focused on tax structures, and a legal team that can handle the transaction.
Because your business, both now and in the future, is your source of wealth, it makes sense to work with a financial advisor that specializes in transitioning business owners to liquidity. Decisions should be made with your long-term wealth in mind, whether it is valuation, taxes, sales structure, monetizing assets, or your compensation for ongoing involvement. A fee-only financial advisor doesn't have a conflict of interest, so they can develop the needed expertise to look across the entire transaction, quarterback your team, and then structure your resulting liquidity to create the retirement you want.
The Bottom Line
Selling a business to fund a retirement should start with the retirement part – that's the goal. Everything else should be in service to that, and good planning can ensure that takes place. Working with a Basepoint Wealth financial advisor to get your ducks in order can help you navigate the transition.
The information contained herein is intended to be used for educational purposes only and is not exhaustive. Diversification and/or any strategy that may be discussed does not guarantee against investment losses but are intended to help manage risk and return. If applicable, historical discussions and/or opinions are not predictive of future events. The content is presented in good faith and has been drawn from sources believed to be reliable. The content is not intended to be legal, tax or financial advice. Please consult a legal, tax or financial professional for information specific to your individual situation.
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