Are your dreams of retiring on the sale proceeds of your business pie in the sky?

Whether you went into business with a plan to sell your business in the future or not, at some stage you will need to exit.  But have you planned an exit strategy that will fund your retirement?  Or, are you just presuming that someone will come along one day and pay you handsomely for all your toil and struggle?

If you are in the latter category, think again.  Market predictions show that all your hard work building your business could disappear in a puff of smoke.  However, it doesn’t have to be that way. 

Market Forces are changing

You’ve heard of the baby boomers right?  In fact, you may even be one.  So you will know that the baby boomers will shortly be heading towards retirement.  It’s that fact which underlies recent market research saying that 83% of business owners intend to retire in the next 10 years and 46% of business owners intend to sell in the next 5 years.  Furthermore, 48% of business owners are expecting that sale to fund their retirement. 

That means, there will be a lot of businesses for sale in the next few years, but who is going to buy them?  Not the baby boomers, that’s for sure, which just leaves Generations X & Y; the generations who are mortgaged up to their eyeballs, whose ability to borrow is being squeezed by the credit crunch and who would probably rather build their own businesses anyway.

You can see where I am heading with all of this:  lots of supply but no demand – a sure way to drive prices down.

Not all businesses will suffer

As with any type of market, where there is lots of supply and limited demand, it doesn’t necessarily mean that every business will suffer.  Those businesses which offer a true return on investment for the investor will continue to attract good prices.  It’s those where the current business owner hasn’t given any thought to exiting the business or growing value in the business who will suffer.  Unfortunately, they may not find this out until they have spent part of their “retirement money” on a process called due diligence.

Due Diligence: the purchaser’s weapon

Due diligence is a process conducted by the lawyers and accountants instructed by your potential buyer.  Their job is to identify the potential risks in your business which may impact upon the return on investment for their client.  Due diligence is a tedious process and is going to cost you money in lawyers and accountants fees too.  Whilst the purpose is generally to help the buyer decide whether to proceed with the purchase or not, it is most generally used by the buyer to drive your price down.  The more the buyer will find wrong with your business, the more your retirement fund gets smaller and smaller.  In a worst case scenario, the sale will not proceed and you are left with a hefty bill from your lawyers and a business hanging around your neck like a noose.

Then the regrets creep in

It is when you get the due diligence report and your lawyers bills, that the regrets start to creep in.  Regrets like:  Why didn’t I get a proper employment agreement put in place at the beginning?  Why didn’t I secure written supply agreements with key suppliers?  Why didn’t I protect my IP?  The list goes on.  But of course by this stage, it is too late.

It is too late 6 months or even a year out from sale

If you want to exit your business at some stage in the future, whether it be 2 years, 5 years, 10 years or 20 years, the time to start preparing for it is now.  That’s because the longer you leave it to put in place key agreements and putting your business in a state where anyone could run it without your input, the harder and more expensive it gets.  Take a simple example of employment agreements.  You cannot move your employees from a badly drafted employment agreement to a robust employment agreement without their consent.  If the badly drafted employment agreement works to their favour, do you think they will give their consent without a financial incentive?  Similarly, if your business shows a history of poor cashflow due to inadequate terms and conditions of business and in effective systems, that will affect your ultimate sale price.

It’s like selling a car

If you are selling a car, the first thing your buyer would look for is a full service history.  The point behind this document is that it demonstrates the car has been looked after during its lifetime and is therefore going to be more reliable.

If on the other hand you had things fixed up just before sale, you won’t have that history of reliability, and therefore it will present more of a risk to the buyer.

Make sure you can demonstrate reliability in your business

Buyers and investors will always prefer a safe return over a risky return.  If you can demonstrate reliability in your business year after year, your business will sell for good money and fund your retirement.  But that requires you to put the systems and agreements in place now.  Investment of that nature now, will pay dividends later on when you come to exit.

© Michael Smyth. Would you like to use this article in your newsletter, on your website or in your magazine? If so, I would be happy to give you permission. Simply click here to find out how you can use this article