By David Henning, CPA, CGMA

What do you want to be when you grow up?  A doctor?  A teacher?  Your own boss?  For me, my answer always was, and still is, “Retired.”  I knew that I wanted to be an accountant as far back as high School, but even then that was not my end goal.  The big goal was a career that helped me be successful, feel fulfilled, rewarded even, and most of all help me to live a happy and comfortable retirement.

As a CPA, it is a priority when consulting with business owners to keep them tuned into their futures and work with them on a consistent basis to help them steadily reach their specific end goal.  I not only ask where do you see yourself in 5 years, but what is your exit strategy.  No matter what their end goals are, business owners must always have an exit strategy and be prepared to answer this one question, “What do I do with my company when I want to retire?”  So many of my business owners are focused on doing what is needed day in and day out to keep their business going strong that they often don’t have the time to sit back and think about the future of the business.  We say that is “working in your business, not on your business.”  A good entrepreneur will do both, and there is no shame in asking for help with either.

There are several points on which to focus that will always help give a bit more clarity as well as help you to identify what you need to do now so that when the time comes, you are prepared.  The first question most have is “How much can I get for my company?”  When anyone looks at retirement, we have always been taught to consider what our lifestyle will be when we retire and how much money we need to be able to live that lifestyle.  For most small business owners, the business itself is one of the biggest assets in their portfolio and most will rely heavily on its value to help them fund their retirement budgets.

Business owners must identify what will make their company more valuable to an outsider looking to purchase the company.  Depending on the business, this valuation is determined by several different factors.  Does the company have tangible property, (Equipment, Buildings, and Land) that has been acquired during the life of the company that holds value?  Does the company have intellectual property or other intangibles (Goodwill, Trade Name, and Customer/Contact lists) that are valuable and worthwhile for an outside party to invest in?  If you are a professional service business like a physician or an attorney, the true value in your company is you.  Your customers/clients are paying for you because of either the specific level of work you do or the relationship you have with that customer/client.  Because of that perceived value, a buyer may want you to continue to work for a pre-determined time, so that you can transition client relationships to the new buyer.  This may not seem ideal; you are not retired, and now are now working for someone else.  In these situations, the business owner should factor those additional years of work into their secession plan.

It is important to keep the previous determinates in mind, however, one variable will tend to drive most sales negotiations:  Does the company generate enough cash to be able to justify covering the appropriate return on investment for the interested party.  Even if you have assets that are carrying good value, without the proper cash flow, a new investor will not be able to afford to cover normal operating expenses as well as cover any new debt encumbered to buy the business.  With many variables affecting the price, it is imperative for a good business owner to identify what value is held by their company, and start developing a plan now to drive those tangible and intangible assets to reach the desired sales price.

The next, and just as important point to be considered is, who will be the one to take over your company.  That point must be considered in conjunction with the sales price because with each candidate, the sales price could differ drastically.  The chances are you may already know the person, whether you have identified them yet or not, that will be the one taking over the business.  One of my favorite businesses is the family owned business.  In many cases, generations upon generations have built these companies, and it takes careful planning to be in a position to leave these assets to the next generation. You must derive a way for the business to pay its worth to you to be able to fund your retirement.  That can be done by generating enough cash flow while you are employed to maximize your retirement accounts so that you can walk away when the time comes without putting any further financial strain on your family to buy you out.  This can also be done by having enough positive cash flow to support the owner/seller-financed loan, or a loan from a bank that is used to give a lump sum payout when the owner is ready to retire.   The walking away price will be drastically affected if the company does not have enough cash flow to support the sales price.

A business owner might also be considering selling the business to a current employee or business partner.  It is easy to assume that your business partner will take over when you are finished, but do they have enough expendable cash to be able to buy you out?  If it is a current employee, have you trained and developed them to be ready for the position when you are ready to walk away?  In these situations, it becomes similarly important as if you were handing the company over to a family member; there must be enough current cash flow to support your buyout option.  A current employee or business partner will already have a vested interest in wanting to see the company succeed so it could be an easy sell, if you can get the value out of it that you need.  I recommend that a retiring business owner give employees and partners ample time to begin their planning process as well.

If you have no family to consider, and you have no current internal relationships, you may very well be selling to a competitor or other interested party.  They would most likely be looking to use your business to break into a geographic area, or utilize the expertise that you have developed rather than starting from scratch on their own.

The plus side to these types of buyers is that they have the means to absorb your buyout cost and may not balk at the price tag.  On the downside, these buyers are much harder to find and you have to be ready to hold the company for a while to find a suitable buyer or even list the company publicly as being for sale.  Each has its drawbacks and you must be able to determine if that is something you are willing to do in order to sell your company.

No matter what your situation is, the most important thing to remember is to start now in your planning.  In order to get the most out of the business, there must not only be a plan in place, but you must be able to track your progress along that plan.  The only way to know if you are on track is to monitor your progress and if you find that you are not able to meet your goals, adapt and re-evaluate your final plan.  Work closely with your CPA or consultant in developing and monitoring your plan.    Please look for my next article when I focus on Merger’s and Acquisitions and the tax consequences associated with selling and buying a business.