Has the constant drumbeat of negative talk about the dismal state of the national and world economy made you fearful about coming to terms with your own state of affairs? Without a doubt, navigating these tricky waters takes a bit of doing now, especially when you may be contemplating retirement.
For sure, retirement is a place without clear borders, although 83 percent of adults ages 65 and older describe themselves as retired, reports the Pew Research Center. This statistic most definitely does not exclude busy executives with retirement on their minds, but leaving the workplace with a clear conscience may not be easy. According to a survey conducted by the Small Business Administration, only a quarter of businesses with less than $200 million in sales have a formal exit or succession plan.
Where does that leave the heads of the companies who are contemplating an exodus from the work force? What about leaving the business to their heirs? If there is no next-of-kin or if family members are not interested in assuming the reins of the business, what next? How does an executive with a lucrative business move on to the next stage after years of successfully calling the shots? The answers in most cases are not easy and must be carefully studied.
Plan an Exit Strategy Early
James Newman, a partner in the law firm Holland & Hart, said ideally, the owner of a business is always planning an exit strategy. “It’s something people are planning for and working towards as a process instead of having to react to a set of circumstances,” he said. Newman lists three types of exit strategies: Simply selling the business; taking the company public, which creates liquidity for stockholders; securing a strategic partner who has additional strengths that allow a company to move from one point to the next perhaps not previously considered by the original owner; or merging with another company.
Newman added, “It may sound odd, but when you plan your exit, it’s also important to know what kind of deal or deal terms you don’t want. This way,” he said, “if someone presents you with something you can’t live with, you can simply move on.”
Howard Olsen, 64, the president of M3 Planning, a company involved in developing strategic plans for businesses, wholeheartedly concurs with Newman, but to Newman’s list of exit strategies, he adds these: Transfer ownership to a family member; sell to employees or other owners; liquidate.
“If you plan your business like you’re going to get out of it, you’re building its value,” Olsen said. “That’s going to be your nest egg to carry you over [in retirement]. But most people don’t do that.”
Olsen should know. At 64, and nudging retirement age, he followed his own advice and started the exit process almost from the inception of his business; however, complete retirement is not what he wants. Since he has the luxury of having heirs who are actively engaged in and excited by the family business, a scenario not enjoyed by many executives looking to leave their marketplace, Olsen plans to lend his expertise well past retirement age.
“We’re all created for a purpose,” he said. “When you lose purpose, therein goes the joy and fulfillment in life. I’m using what I’ve been trained to do now and I’ll use it into retirement.” Olsen said in his case, when the time comes for partial retirement he won’t work the long hours it took to establish his business, but he will have a presence there. “I feel there’s so much an executive can give back, so much knowledge he or she has to impart, why retire?”
A smooth exit requires the help of experts. Nevertheless, many owners don’t have the luxury of succession. What then? Not only is the process of departing a business an emotional one for many, but it can be fraught with legal questions out of the realm of the key players in the sale. This is why all of our experts resoundingly echoed the same advice – engage the experts:
• A certified public accountant with estate planning experience.
• An estate attorney.
• A financial planner or money manager.
• Perhaps a life insurance specialist.
• A valuation expert, sometimes called a business broker.
A business broker may be broadly defined as a person or firm acting as an intermediary between sellers and buyers and can range from a real estate broker to a full-fledged investment banker, albeit with huge differences between the two.
“They cost money,” Newman said. “You need to do a cost-benefit analysis and remember, the fee comes right off the top of the transaction.” However, Newman said, seeking the services of a broker will at the very least help you to determine if an offer is a good one for your business. “It’s important to make sure the broker is experienced, qualified and properly licensed. There are different levels of licensing,” he cautioned.
In addition, a business broker can bring multiple offers to the table and can help screen or qualify potential buyers. “A lot of business brokers know who the players are; they have databases full of names and have better means to bring buyers to you.”
Robert A. Martin, regional president at BNY Mellon compared the services of a business broker to a beauty contest. “A business broker can find multiple people who are interested in the business and can sometimes conduct a bidding war, thereby maximizing the value of the business,” he said.
Both Martin and Newman stressed the need to maintain an open line of communication with the experts, in this case the business broker. “Always talk to your advisors,” Newman says. “They can tell you if the deal would be tax advantaged for your company – often what is tax friendly to the buyer is tax adverse to the seller.”
On the subject of the possible need for employing the services of a business broker, Reed Radosevich, Nevada president of Northern Trust, a provider of financial solutions for affluent people, added that on average, a business will sell for four to six times its annual cash flow. However, he cautioned, this number can vary considerably based on a number of factors: the speed at which the business is growing; the type of industry and the involvement of patents or intellectual capital, to list just a few.
The Sale is Complete. Now What?
Typically, according to Radosevich, you’re not going to receive as much income from a diversified investment portfolio invested from the proceeds of a sale as you were making as an active principal in the business. “You can figure that you’ll make about half of your salary,” he said. In addition, Radosevich cautioned, the fees for the sale of the business and the taxes both need to be paid out of the proceeds of the sale, an often overlooked, but important detail.
This is where a financial planner or investment advisor can be invaluable to a business person with retirement in mind. According to Radosevich, “Once an owner has an estimate of what their business is worth or can be sold for, they need to consider whether the net proceeds can sustain their existing lifestyle indefinitely.”
When determining how much the nest egg or net proceeds needs to be to live comfortably, Radosevich listed these important facts to consider:
• Average historical inflation is 3.1 percent, which means that a loaf of bread that costs $3.39 today will cost $6.24 in 2029.
• Average historical return for government bonds is 5.5 percent; the stock market is 10.4 percent.
• Investing is a long-term proposition.
“One needs to also consider that the retired owner will have more free time and therefore have different living expenses,” Radosevich said. “Can they afford to buy a vacation home? Can they buy a boat or fancy car? Can they travel extensively?”