How to Super-Size the Cheque the Buyer will give you.
With the baby boomers reaching retirement age, a large number of companies will likely change hands in the coming years. Right now, 20% of small businesses are for sale. Within 10 years that percentage will double to 40% and within 15 years that number will rise again to 70%. Kelowna and the Okanagan, being an older demographic are at least 5 years ahead of that supply curve.
What will be the fate of small businesses when the owners retire?
According to TD Waterhouse’s early October Business Succession Poll of 609 small business owners, only 24 per cent of small business owners surveyed said they had a succession plan worked out for retirement.
Of those polled, whether they had a formal plan or not, 23 per cent said they would simply close their business when it came time to retire; 20 per cent planned to sell their business to a third party; 18 per cent expected to transfer it to a family member; 12 per cent said they’d sell to a partner or employee; and 27 per cent said they were not yet sure what they’d do with their business.
And what will be the likely impact on personal wealth?
When you sell to a family member or employee, there are typically fewer dollars on the table, because the company will be heavily discounted.
Closing the doors means zero return for years of business building.
The people answering “not sure” are likely faced with a Freedom 85 Plan, wherein the owner works until he/she can no longer work- and not by choice.
Of course, if the owners salted money away and used the cash flow diligently to build personal assets, then the owners may have enough for a comfortable retirement, allowing them simply to close the doors.
This article, however, is about those who are relying on the sale of their business to fund their retirement and how to find the retirement money they need.
Simple economics dictate that in forthcoming years, supply will exceed demand and many companies will just be left on the shelf as buyers cherry pick the best. But since the beginning of the recession in 2008 many businesses have faced falling sales and increasing debt. This situation has eroded value in many businesses.
So how can an owner stand out from the rest in a crowded bidding war for a buyer? What will buyers pay top dollar for? Investors look for a return on their investment and will not buy indebted companies with falling market share and paper thin margins. Most of all, they will not buy a business that depends entirely upon the owner to make it work.
- Is there good return on equity – today, not some hypothetical future?
- Does the company have high profit margins?
- What fixable factors mean that the business will be purchased at a significant discount to its value?
- Are there systems in place for the owner not to have to work 12 hours per day?
- What factors will help a buyer get financing from his financial Institution?
If an owner answers NO to any of these questions, then something needs to be done, starting today.
What to do?
- Pay for a third party valuation and ask what factors are holding back the value.
- Pay down debt, starting with the most dangerous debts
- Build tangible assets that hold their value and are essential to the business
- Increase profits and cash flow with a better pricing strategy
- Increase sales with a modern marketing plan
- Create a credible exit plan that identifies to whom you will sell the company and at what price and when.
- Talk to a good accountant about the tax implications of your plan
- Build a solid 3 year plan to make this happen
- Work the plan
- Do something, do anything. Remember that even a dead fish can float downstream.
By Andrew Gregson, Senior Partner at Floodlight Business Solutions LLP, a consultancy focusing on rebuilding sales, rebuilding finances and creating value. call today if you need a guest speaker on this topic www.floodlight.ca.
Email: firstname.lastname@example.org Ph: 888-959-0752