As many business owners approach retirement, there is a common question that I come across; “I wonder how much I need to sell my business for to reach my retirement goals?” The question is asked during our client planning meetings but also in casual conversations on the golf course or at dinner parties. I always respond by suggesting, “why speculate when you can develop a plan that evaluates the net proceeds from the sale and determine how that fits within your overall retirement plan?”
Even if you are years away from selling a business, proper evaluations can help clarify your plan and provide a roadmap for you to accomplish your retirement goals. It also provides perspective as you develop your company’s succession plan and how to transition or sell your business in the future.
Net Proceeds from the Sale of a Business
The first step in the evaluation is to develop a realistic analysis of your business’s value and the net proceeds that you will receive from the sale. There are industry-specific “rules of thumb” that can be used to approximate the fair market value of a business. It is my recommendation to get a valuation prepared by an expert as the value of the business can vary widely as compared to those industry standards. Once you have the gross value of the business, you then need to account for various expenses and fees which might include:
- Fees from the sale of your business related to a business broker and/or investment banker
- Legal and accounting fees
- Payoff of existing loans and liabilities
- Taxes on the sale
- Expenses related to a business closing
The above fees and expenses can drastically change the net proceeds from the sale of your business and should be evaluated to determine a realistic number to add to your retirement plan.
Another related sale item that may affect potential proceeds is that many sales contain an earn-out provision over a year or more. I like to run various scenarios to fully understand the options and risks when reviewing a sale of a business in a retirement plan.
The Retirement Plan
After careful evaluation of your retirement goals, the next step is to incorporate the net proceeds of the sale into your retirement plan. With this significant transition in life, it is important to fully understand what retirement will look like. What will you do with the extra time and what are your true costs of living? Hobbies, travel, family, home maintenance, and healthcare can have a significant impact on your retirement and you’ll want to consider these expenses that may span 30 or 40 years.
This process takes time and thoughtful planning, and the results may not always look as expected. However, the right plan can provide clarity and allow you to make informed decisions going forward. If the numbers work well in your retirement plan, perhaps you decide to sell your business or move forward with a long-term succession plan. You’ll want to continually evaluate your retirement plan to ensure you remain on track throughout this process.
If the numbers don’t work in your retirement plan, you still gain valuable information. Do you need to evaluate your standard of living? Sometimes facing the hard facts of retirement planning can be difficult, but it’s better to adjust prior to retirement instead of waiting until the last minute. Perhaps the information collected means you need to work on growing your business or restructuring it so that it is more valuable to a potential purchaser? Either way, your decisions are based on facts and planning, and not on speculation.
Let’s Work Together
If you or someone you know is contemplating a sale or transition of their business, please don’t hesitate to contact me. I am happy to help.
Todd Flynn, CPA, CFP® is a principal at Soundmark Wealth Management, LLC. Todd works closely with physicians, business owners, and other successful and accomplished individuals to help them define their financial goals and implement an ongoing financial planning process.