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Dear Oaklyn Consulting,
I’m 61 years old and have been working in/running my business for 40 years. I want to retire and I don’t know if I can find a buyer that will pay enough to allow me to retire comfortably on the proceeds. What options should I consider to allow me to retire?
From Oaklyn Consulting
You’re not alone in asking this question, nor are you alone in not having an answer in your early 60’s. This is a puzzle that bridges business ownership succession and personal financial planning, and along with our friends at Bespoke Capital Advisors of Raymond James, we’ll address both topics.
From a business ownership perspective, the options run from no-sale to sale, with variations in between:
1. No Sale.
The steps are to organize the business to run without your day-to-day presence and oversight. Hire a strong manager, take on the role of owner purely, and consider the income of the business to be investment earnings on your retirement savings. A benefit to consider about this path is that many businesses sell for a mid-single-digit multiple of earnings, so it doesn’t take many years of retirement to yield the same financial results as selling the business.
2. Sale.
The steps are to identify specific potential buyers for the business, qualify their interest, negotiate terms of a sale, close the deal and reinvest the proceeds to provide retirement income. A benefit to consider is that you will – after a transition period – have fully ended your responsibilities in the business. The caution is that actual implementation is trickier than theory:
- You need to identify a buyer, negotiate a complex transaction and close the deal. You’ll probably be navigating several parallel negotiations over nearly a year, because it’s common that bids for a small to mid-sized business will vary by over 100% from low to high and these deals take time.
- You could be required to work for several years in the business after sale at a market pay rate for your management role (and not your owners’ compensation). Think about this carefully in comparison to the no-sale scenario.
- As in the no-sale scenario, you will still be better off with successor management in place.
3. In between.
Depending on your specific circumstances, you might also consider various partial-sale scenarios:
- Partial sale to a partner who can help with management succession and the future full sale of the business
- Full or partial sale to management or employees, with or without the tax benefits of an ESOP
- Borrowing in the business to pay a dividend to you as the owner, helping diversify your retirement savings
- If the business or you own real estate that the business uses, selling and leasing back the real estate, also to help diversify retirement savings
From a personal financial planning perspective, Max Dean, Cody Hilbun and Daniel Pakkala at Bespoke Capital Advisors recommend thinking about:
1. “What’s Your Number?”
In other words, what amount would you need to net from the sale of your business—and have actively invested in the markets—to provide for your goals and lifestyle into perpetuity without any sacrifices? This the starting point for our discussions with clients who are contemplating the sale of their business. This critical planning number is the foundation upon which all financial and investment plans are made.
2. Diversification of Assets
The sale of one’s business is ultimately a diversification strategy. An owner liquidates the value of a highly appreciated and concentrated asset (the business), providing an opportunity to build out a diversified portfolio of many different assets. In doing so, we can help mitigate risk and enhanced long-term financial stability. Once we have identified a client’s number, we explore a range of investment options and build a portfolio that is tailored to their specific and unique needs. These include stocks, bonds, real estate, structured investments, private equity, direct lending, and more.
3. Estate Planning
An area often overlooked by business owners. If you believe you will be subject to estate taxes, either before or after the sale of the business, you should start exploring more Advanced Estate Planning options before you ultimately sell your business. There are solutions which are best deployed while you still own the business. Yet, if you don’t think your family will be subject to Estate Taxes, you still may need to update your plan – as even families with $10M of Net Worth have considerable wealth transfer concerns.
4. Tax Mitigation
How you are looking to structure the sale of the business can drastically impact the NET of what you receive. Solutions like installment sales, holdbacks, rollover equity, and deal structure like a stock vs. asset sale can drastically impact the taxes you would pay. It also matters what state you live in – and if that state has associated income taxes.
Max says, “The ultimate answers for your situation are very Bespoke to your family, yet we hope this has provided some helpful steps on how to best retire.”
Raymond James & Associates, Inc., member New York Stock Exchange/SIPC. Opinions expressed in the attached article are those of the author/speaker and are not necessarily those of Raymond James. All opinions are as of this date and are subject to change without notice. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Every investor’s situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. The forgoing is not a recommendation to buy or sell any individual security or any combination of securities. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material.
