Business Sale-ing into Retirement

Retirement planning is a long uphill battle.  As financial planning professionals will tell you, the sooner you start putting in place a comprehensive plan, the better off you’ll be.  Oftentimes, small business owners invest everything into their companies and bank on utilizing the proceeds from the future sale of the business to fund their retirement.  With an average sale price of $180,000 for small businesses, this lump sum is far from an adequate base to live off of for the next 20+ years. Granted, the majority of companies that we work with are much much bigger – but our experience is that owners consistently tend to overvalue their companies.

Here are some key statistics provided in an interesting article regarding funding your retirement with this onetime liquidity event:

• Out of 1,987 small businesses sold in Q3 2014, the median sale price was $189,000 (BizBuySell.com).
• By age 65, an average full-career worker needs to have banked 11 times annual pay. That means a household earning $75,000 a year would need to have saved $825,000. Work to age 67 and the multiple drops to 9.4 ($705,000); retire at age 62 and the multiple rises to 13.5 ($1 million).
• EBRI estimates that a 65-year-old couple in 2019 that does not have any employer-provided health benefits will need $450,000 to have a 50% chance of funding health care expenses not covered by Medicare. Even with employer benefits, there is a 50% chance that out-of-pocket expenses will reach $268,000. Plan for this big expense.
• But most alarming is the fact that 43% of small business owners have no formal financial plan in place (Source: Exit Planning Institute).

Still think that $180,000 (or $1.8 million) is enough to live comfortably and enjoy a life of leisure?  Even if a business owner believes their business is worth more than this average, it is prudent to work with a financial advisory team in order to determine the true value of one of their largest assets in order to bridge the difference in what will need to be saved and invested over time.

It’s incredibly important to set yourself up for success:  well before the decision to go to market you should be arming yourself with two critical pieces of data:  what is the business worth, and how much do I need?  We call this process “Gap Analysis” – and it’s literally the first step of every exit planning engagement we take on.

Takeaway: Understanding business valuation early, and working with a financial advisor, can help you set the right track.