If your nest egg is your business, ask yourself these questions to make sure you can sell it for a good price when it’s time to retire.
In the first part of this series, I discussed how small-business owners can determine how much money they need in order to have a comfortable and dignified retirement. Once you know “how much” you need, the question then becomes “How do I fund this amount?” The money needs to come from somewhere. Knowing that you’ll need $8 million in 15 years is important but devising a funding strategy to reach this goal is just as important. Fortunately, business owners have far more flexibility in funding this goal compared with their employed counterparts.
How Entrepreneurs Should Fund Retirement
Plan A: Sell Your Business
For many small-business owners, their retirement plan consists of selling their business when they are ready to retire. This strategy carries inherent risks since it concentrates your wealth in a single source that is subject to a number of potential threats: new competition, a changing marketplace, availability of buyer financing and many more. As a business owner you must keep realistic pricing expectations, take steps to hedge against risks and maximize the potential sale value of your business. Some ways to do this are:
- Limit customer concentration. No single customer or client should represent more than 10 percent of your annual revenues. Potential buyers will reduce their offer price to adjust for the risk of having too much of your business tied up with one customer.
- Understand the pricing dynamics of your industry. Each industry has a typical price range for which small businesses tend to sell. This market price is usually expressed as a multiple of revenues or “cash earnings” and varies greatly depending on your industry. If the price you think your business is worth falls outside of the range of multiples for your industry, you need to adjust your expectations.
- Make yourself redundant. For a business to have any value in the hands of a potential buyer, it must function without you. What would happen if you disappeared for two weeks? Would your business still be operating smoothly upon your return? If not, then you need to make some significant changes to your operations. Otherwise,
