That was the gyst of a text message I received from a long time client last Sunday. After I swallowed a few times and put my heart back where it belongs I called my client and had a gut wrenchingly honest conversation about what happens next and where we go from here. He’s 57 years old, divorced and utterly alone.
Statistics Canada Recently Revealed half of Canadians who own small and medium-sized businesses (SMBs) are between the ages of 50 and 64 – an age when employees typically make full use of retirement programs such as workplace savings plans. Yet, owners appear less likely to plan ahead. According to the Exit Planning Institute’s 2013 State of Owner Readiness Survey, 83% of SMB owners have no written transition plan and 49% have done no exit planning. [Canadian Business; Fall 2014 volume 87, issue 11/12]
That is the opening paragraph of an article in a recent issue of Canadian Business Magazine entitled It’s never too early (or late) to plan for succession and it get’s right to the point. Canadian Business owners are unprepared for the next phase of life.
I’ve had similar conversations with business owners many times. It goes something like this, “my business is my retirement plan, revenues were $100,000 last year and I can reasonably expect to sell for 5 times earnings so I will pocket $500,000 that’s more than enough to fund a comfortable retirement.” Most business owners base their assessment of the value of their business on that one number, gross revenues. But to put it bluntly – to base value on just one factor is insanity and it rarely works out.
There is an old adage in sales that applies perfectly when selling a business that goes like this: The value of anything, commodity or service is precisely what other people are willing to pay for it, no more, no less. There are dozens of factors that go into valuing a business far beyond just gross revenues.
Here are a few just to jump start your thinking.
1 – The number one revenue generating factor in your business isn’t for sale.
Think about it. You are selling your business so that you can retire but the number one factor in the success of your business so far has been you! A business coach friend of my once told me that he spends most of his time trying to get entrepreneurs to think about their business as a entity that will outlast them, they work on putting in place systems and procedures that can run without the direct involvement of any specific person. As he puts it you need to transition to a point where you are working on the business not in it. Otherwise you don’t own a business at all, you own a job. When you go to sell you are really only selling used equipment, inventory and a client list that has no loyalty to the new owner. There isn’t much value in that.
2 – Employee retirement plans aren’t just for employees.
According to a survey done last year by Manulife Financial 67% of Canadians said they wish they’d contributed more to RRSPs. Employees that had the option to contribute through a plan sponsored by their work place were far more likely to have made any contributions at all. But employers who offer plans were no more likely to have made contributions of their own. Offering a group retirement plan through your company payroll is a great way to set up your own RRSP program as well. Not to mention the less tangible factors benefits provide toward employee retention, less stressed and more focused workers.
3 – Make sure you have a contingency plan in case of an unexpected exit.
Few things destroy the value of a business more than the need to sell in a hurry. What if you have an unexpected health related event and need to retire next week? This goes back to that text message I got on Sunday. What kind of price would he be able to get for a business know? Luckily this particular client has in place adequate Disability Insurance and a personal pension plan that he can draw on first but he is still being forced into retirement about 6 years sooner than anticipated. If this were you, how would you cope with the short fall?
These are just three factors that should be considered when planning the exit from your business. I’ve barely scratched the surface here. The bottom line is this; don’t fool yourself into thinking that your business will fund your retirement without doing some real deep analysis of the facts. You may be right but in my experience most business owners have an inflated idea of what their enterprise is really worth. As a result they are either forced to live on less than they should or work longer than expected. And some, like my recent client need to make a speedy exit that erodes their value even further.
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