Exiting Your Business: A Retirement Plan
62% Males Versus 52% Female Business Owners Say They Have Made Plans for Their Retirement
There was some great research published by the University of West Australia through their Business School. They interviewed 200 small businesses mainly reflecting on what they were doing in terms of actively planning for their retirement.
I think what was crucial about was while 62% of the male business owners survey said that they were actively planning for their retirement, only 52% of female business owners said that they made arrangements to retire.
The scary thing that I saw in that particular article that was talking about the research was that small businesses are not required, of course, to put aside funding for retirement. And people usually say that they’re going to sell their businesses.
I said it so many times before, you have to have something to sell. And not only that, there has to be a market. We’re facing a decade now where we have a lot of baby boomers who are looking ahead to retirement and unfortunately 70-80% of their net worth is actually tied up in their businesses. They think that that’s going to be their nest eggs for the future.
Well, it may not be so. Unless you really actively plan your business to get it ready for sale, then you’re not going to be able to stand out for the crowd. There really is a tsunami of business sales coming. Whether there’s a market or not will depend on how good your business is and well you’ve actually prepared your business for sale.
Let’s have a think about that in terms of where you sit right now. One of the things I’ve come across lately and I really like the expression which is, “What is your enough is enough number? How much money do you think you are going to need to retire with? And where is it going to come from?”
I’m not a financial planner or accountant but I think a really good rule of thumb to use that if you think that you’re going to need $100,000 for instance to live on, then how can you earn that money from a capital sum? In today’s interest rate environment if in fact $100,000 is what you’re looking at and that actually you can only earn 2-3% in what – and I use this term in quotes – might be considered a safe investing environment, then you’re going to need a couple of million dollars minimum to be able to put aside as capital to be able to earn that sort of money.
Where is that capital going to come from? We’ve got a whole range of other discussions that we can go into about that. But if in fact, that capital is tied up in your business now, the most important thing that you can do right now for yourself and for the future is in fact to get your business ready so that it’s managed for sale and transition for yourself.
Will your business be one of the 25% that can be sold?
I was reading some other information. In fact that came out of the US. They were saying that only 20-25% of small businesses are ever sold. Now, that is a really, really scary statistics especially if you are thinking that your business in fact, is going to be a nest egg.
I also saw some information from the Commonwealth Bank that said that 60% of small business owners actually weren’t even thinking about their exit strategy; that they felt that their business, they’ll get to stay in their business almost for as long as it took to be able to go out with their boots on. In other words, leave the problem to someone else basically when the time comes.
Now, I don’t think that that’s a really good outcome. I really think that the best thing that you can do is to really take the time, do what it takes to be able to make your business stand out from the crowd and become attractive to a buyer.
I had lots of conversation with lots of people over the last few months with who, fortunately actually becoming aware that they really do need to do something about planning for their exit. And the interesting thing is that most people don’t realize the length of time it will actually take. If you can give yourself two to five years, that is absolutely ideal.
One of the things I always say when I’m doing my workshops is that using a phrase that Kerry Packer expressed when he sold Channel 9 and that is to, “Always have your business ready for sale. You might not get more than one chance. Not everybody gets an Allen Bond in their life.”
Now unfortunately, neither those two gentlemen are still with us but that’s what happened of course. The business Channel 9 was ready for sale when Allen Bond came along and offered it a crazy sum of money.
What I’m really encouraging you to do is to think about your own business and what you can do to be able to improve the business, to be able to make it ready for the next person who comes along who might be there and be able to offer you an incredible sum of money.
Now, often you find that there’s a whole lot of hurdles that you actually have to leap. They can range from having how to structure the deal, having third parties involved where you need to get consent, finding that there’s some undisclosed liabilities hanging out there.
Obviously, you’ve got to have cooperation from your employees and this is a really delicate issue that you need to consider from time to time. And of course, there’s also everyone else out there who’s going to have their own opinion as well as to what they think you should or shouldn’t do.
Then, of course maybe you’ve got the battle between the lawyers or the accountants and the merger and acquisition people that might come along all with different perspectives.
Last but not the least, every once in a while, you know, someone gets cold feet and when the day actually comes, they don’t really want to sell the business after all because this is your life. This is something that you had that you’ve been involved in for many, many years and just thinking about what comes next is really, really important.
I’m really asking you to consider all those things before you take the leap but most importantly, what we need to do to be able to get your business ready for sale so that you are attractive. I know I might sound like I’m repeating myself but to make yourself attractive to the buyer so that they don’t have a decision to make because your business is the best out that’s there that actually stands out from the crowd.
Hurdles to Get Over When Exiting Your Business
One of the things I touched on in my new book that’s coming up in the next few months, is in fact some of these hurdles that you’re going to need to leap over. Some of them that I’ve come across may seem really basic to you. There’s a few that I want to cover right now.
At the very base of it all is in fact the owner’s failure to plan for the sale. That really is the number one reason that businesses don’t sell. There’s some really scary statistics that come from the US. There’s no reason for us to think that it’s any different for Australia even though the actual numbers might be different. The percentage is pretty much the same.
There’s only 20-25% of small businesses are ever sold. Planning is the most important thing that you can do. As I’ve said before, if you don’t spend enough time and enough resources planning for your sale, you’re not likely to be successful.
That’s not what I am on about. I want you to be the successful ones that actually do stand above the crowd.
That’s the number one reason that businesses don’t sell. It is because you fail to plan.
One of the other reasons that come along is really low or inconsistent gross margins. Some of the business owners that I chatted to, I’m finding they don’t really have a handle on some of the margins and the numbers that are actually running in the business.
When I do a health check, this is an area that we really go into quite deeply to work out what the numbers are and where the consistencies are throughout the last couple of years – two to three years. Again, this is one of the reasons that you need to give yourself enough time. Because when you have to make changes to make your business far more attractive, then you need time to implement and put those systems and processes in place.
If you haven’t got consistent gross margins, you’re not making it easy for the next person who comes along to be able to say, “Yes, I want this business and yes I know how to grow this business.”
One of the other major hurdles is the fact that you’ve got unrealistic price expectations. This is a bit like selling a house in many respects. It’s quite an analogy that people can really relate to.
The vendor or the person who’s selling the house often has an insighted idea of what the value is really is. You know what, business owners are quite often the same. You really have to work hard to make sure that your business is worth every cent that you’re asking for it.
When you sell it, it should be really joyous and be an occasion that requires celebration. Knowing and understanding the realistic value before you decide to sell is one of the most important planning steps that you can actually take.
Again, one of the unfortunate reasons that people has to sell is that they’re forced to sell. This is often about not having considered all of the contingencies that might come up from time to time.
In my book, I talked about this [0:11:55.1]. Sadly, I’ve experienced many of those throughout my business career. This is something that can be addressed when you think about it a little more clearly; put in place the agreements that you need to have; double check to make sure your insurance is covered.
But when you’re in a position where you’re forced to sell, that’s when you’re not going to get the most out of your business. It’s going to be almost like a fire sale.
Best thing you can do is to sit down, get a realistic valuation of the business. Understand the tax implications as well as of any sort of sale and make sure your own financial situation is taken care of if you happen to find yourself in a position where you actually have to make a sale quickly.
One of the other areas that’s often crucial that you find that can often be a barrier is in fact not having adequate second level management. The buyer wants to make sure that they can rely on the business to run successfully without you being around.
I think I mentioned it before in some of my other blogs that the reliance on the key manager is of course, is something that detracts and takes away value from the business. It’s really important to make sure that you can set the business up to be able to run successfully without you but also to make sure that you do have employees who can help deal with any difficult issues that may arise and who are well qualified to be able to make sure the business can run without you being around.
So hope you found those helpful to be able to think about over the next while.
Personal Transition Planning
Leaving a business successfully is like building a great new home. One of the things you have to do is start with a really strong foundation and that involves personal transition planning. After that, you’re going to add the flaws in the walls and the roof which means looking after your financial plans, your succession plan, your business contingency plans. And then, you’re going to fill up your home.
In other words, have a life full of choices and full of possibilities which means figuring out what the right activities are, what the right occupation is once you finished the business, what the right location is, where you’re going to be.
Lastly, you’re going to start your new life which is having a healthy balanced, purposeful and significant life because so much of you has been tied up in your business.
Now, I want to go back to the beginning of that little summary which is starting with a strong foundation and having a personal transitional plan. What does that mean? Those are great words but what does that actually mean?
Before you really even start to exit your business, what you really have to do is consider the plans that you need to make for both you as an individual, as a business owner, also the business, also your family and who else is going to be affected which of course is your employees.
Business systems and family systems are quite different. I often joke about this with my husband and say, there’s no way in the world he’s going to retire because, “You know what darling. I love you. I married you for better or worse but not for lunch.”
That usually invokes a chuckle. I hope it did for you.
In all seriousness, it really is one of the most crucial things for you to consider because when you leave a business, your life changes. As I said before, the systems that operate in the family are different to the systems that operate in the business.
Working through those is one of the delicate issues to be talked about. When I first retired, actually I have retired once. I found I needed to get back to work because I was so bored. But before I made the decision to retire, I sat down with the kids and husband and said, “You know what, I think I better spend some time with you especially with the children. What do you think about that?”
If they said to me, “No, mom we’re quite used to having you out of the place and not being around. No, we’ve got our own lives to live. We don’t really want you here.” Well, that would have been a completely different thought process for me to go through. I would not have retired.
In the event, in my case I was thrilled they said, “Yes, please Mom. We’d love to have you around a little bit.” So, I made a decision to exit my business back then. That was actually the third business and to spend a few yours with them while they finished their school and off to universities. From high flying business woman to mom’s taxi service.
The difference then that I had to confront was how was I actually dealing with that personally because I’ve been used to every day getting to work, get in the office, dealing with wonderful clients and making things happen in that respect. And then to transition to the other side of the fence, I think the same feelings will occur whether you’re a male or a female.
You have to find something else to do. What’s the new purpose in your life now that you made those changes?
That was a really an example of being able to think about and talk about the system and the family then and how that was affected by my being around – as I said jokingly before about my husband being around. Every family is different of course, and every business situations is different.
I urge you to give that some really serious consideration at the same as we work towards making your business the best it can, to make it as attractive as it can be for our future potential buyer.
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