By: Srbo Radisavljevic, CFP®, CEPA®
According to the SBA, small business owners nearing retirement are less likely than their employees to have a well-funded retirement plan. Even business owners who do report contributing to a 401(k) or other traditional retirement saving plans, say the vast majority of their wealth is in their business, which they’re relying on to fund retirement.
The risk is that the business may not be worth what an owner thinks it is, and when they retire, they’ll lack the resources necessary to maintain the lifestyle they desire.
If you are counting on your business to fund retirement, here are five things you can do to help build value and be ready when it comes time to sell.
1. Focus on Financial Health
When it comes time to sell your business, it’s important to have several years of clean and accurate financial reports ready to show potential buyers. Reports such as income statements, balance sheets, and cash flow statements, should all provide consistent and reliable information based on a well-maintained chart of accounts. Accurate financial reports will also reveal the true performance of your business, allowing you to do things like see what’s driving profits, manage debt more effectively, and improve cash flow.
2. Optimize Operations
If you’re not continuously looking for ways to streamline and improve business operations, you risk stagnation or even failure. Here are three areas to focus that can help grow the value of your business:
- Increase Efficiency: Make a point to invest in things like technology and employee training that can improve processes and increase overall productivity.
- Build a Strong Brand: Develop a unique value proposition and use it to expand market reach. Constantly looks for ways to enhance customer loyalty and satisfaction.
- Diversify Revenue Streams: Build a resilient business model that is open to exploring new markets and products. Avoid vulnerabilities such as becoming overly dependent on individual clients or suppliers.
- Create Turnkey Transition Model: Establish operations that allow the business to function smoothly without your involvement for up to a few months, thereby making it turnkey for any future owner, regardless of the exit strategy
3. Be Due-Diligence-Ready
A potential buyer will request a trove of information about your business, so you need be prepared to hand over the documents, data, and other information they might want. Here is a list of typical items a buyer may ask for as they evaluate your business:
- Financial due diligence – Be ready to provide all your company’s financial statements, including revenue trends, tax statements and general ledgers. A buyer will also want to know about outstanding debts and liabilities as well as financial projections.
- Legal due diligence – The buyer will want to review a complete list of your company’s property, including real estate, personal, and intellectual property, as well as copies of any current contracts and agreements with suppliers, customers, and employees. If your company is part of any lawsuits or has any legal or compliance issues, be prepared to disclose that information, as well.
- Operational due diligence – Have current information about your business’s marketing and sales strategies, inventory management, supply chain, production methods, IT systems, cybersecurity, and management team
- Human resources (HR) due diligence – Expect a potential buyer to examine employment records, such as contracts, benefits and compensation packages, as well as employee turnover rates. Have your HR policies and procedures ready and be prepared to disclose any current labor disputes or claims.
- Industry-specific due diligence – If your business is subject to government regulations, you’ll need to demonstrate compliance. You might be asked for copies of permits, registrations, and licenses.
4. Assemble a Strong Team
An experienced team of professional advisors is crucial. Here is a brief list of who you should consider having on your team:
- Financial Advisor – Provides guidance to help you identify and achieve your financial goals and will alert you to a possible wealth gap based on your business valuation.
- CPA – Offers highly skilled accounting expertise for financial reporting, tax preparation, auditing and valuation.
- Business Attorney – Brings essential legal expertise to protect your interests and ensure a smooth and successful transition.
- Estate Planner – Help minimize estate taxes while assisting with the creation of a will and trusts designed to benefit family members and/or charitable organizations
- Family Members – A council of family members can assist in managing disputes that might arise between the family and business.
- Board of Advisors – Provides the owner and their family with valuable advice from individuals with similar experience.
- Risk Advisor – Helps mitigate and manage risk by providing business insurance such as liability, cybersecurity, life, disability, etc.
- Mergers & Acquisitions/Investment Banker – If you sell to a third party, this advisor can help position the company for sale and negotiate the deal
- Growth Advisor – Also described as a Value Advisor, they can help manage the business’s value.
5. Create a Comprehensive Exit Plan
Luck favors the prepared, so when it comes to exiting your business, be sure to plan for each possible contingency, otherwise known as the 5-D’s:
- Death – If you were hit by a bus today, what would happen to your business? What would your family and management team need to know and do?
- Disability – If the bus just puts you in a coma, what happens then? Have you designated a power of attorney for financial and medical matters? Would this event result in the purchase of your ownership shares of the business?
- Divorce – How will your shares be valued in a divorce and what will the financial impact be on the business?
- Disagreement – What happens If your business partner wants out? If a dispute with a partner grows contentious, how can you protect the business?
- Distress – The COVID pandemic is a good example of a business disruption that’s beyond our control. In the event of an unforeseen disaster, what’s your backup system? Do you have insurance to cover a major disruption?
Start Preparing Now
If selling your business in the next 5-10 years is a possibility, the time to start preparing is now. To find out more about how to build value in your company and prepare for a smooth transition down the road, contact KRD Wealth Management. We are ready to provide the guidance you need so you can avoid the risk of a wealth gap and enjoy the retirement you deserve.
