Can you finance your retirement through the sale of your business?
Business owners’ personal lives - their goals and hopes - are typically so immersed with their business that they can hardly imagine being retired. Whether or not your daydreams of making the next big business deal have been replaced by daydreams of spending your days relaxing at home, retirement is a reality.
If you are wondering if you can finance your retirement by selling your business, you need to split the question into two parts. The first part deals with your retirement. It’s necessary to determine the minimum amount of money you need to retire and make important determinations about the lifestyle you want to have and how much that lifestyle will cost.
The second part of the equation is your business. It is necessary to find the best strategies for maximizing the sale of your business and then estimate how much you can get from it. With those two parts in place, you will have a clear estimate of how much of your retirement can be funded by the sale of your business, and how much needs to be accounted for through other retirement savings plans.
First, estimate your retirement income. This can include trusts, pensions, part-time work and more. In order to be conservative, it’s wise not to include Social Security in your calculation, particularly if you aren’t retiring in the next 15 years or so. This is because of the ever-changing structure and status of Social Security benefits.
Next, calculate your annual expenses, which you can base off what you spend now. Don’t forget that some major expenses won’t exist in retirement, especially if you pay off your mortgage or downsize your home prior to retiring.
Keep in mind that you won’t simply be able to spend the same amount each year of retirement, due to inflation. Your retirement needs will also depend upon the age at which you plan to retire, which you can adjust if you find your nest egg is insufficient to cover your desired retirement lifestyle.
Once you’ve determined how much you need each year, speaking with a financial advisor can give you the best approximation of how much you need to retire comfortably. This figure will never be set in stone because it is impossible to see into the future to know how the economy will be, how your investments will perform or even how long you will live.
When you have that overall number, you can subtract your expected retirement income to arrive at the number you will need to gain from the sale of your business. If that number seems much higher than you expect you could get from the sale of your business today, don’t dismay. You can use that number to make your business more appealing to buyers and work toward your target as you near retirement age.
“A good business broker or other financial professional will be able to give you an idea of what your business will have to look like to fetch the price you need,” according to Doug and Polly White, contributors to Entrepreneur. “You should consider things such as revenue, profitability, management structure and prospects for the future.”
You can work with your financial advisor to make a plan to improve your business in a way that will get you to the number you need. Spending a few years preparing your business for the sale can make a tremendous difference in your selling price. This is partly due to the fact that buyers want businesses with actualized and measurable success and not just the potential for growth. Furthermore, past success is generally not a strong selling point. So if your business is in a slump, it may be best to wait to sell.
“Buyers are interested in recent performance (usually the last 12 months) and future sustainability and viability, especially if you operate in a dynamic space (such as with websites),” states Thomas Smale, contributor to Entrepreneur.
It is important to show proof for all revenue claims, but also be aware that profits are more important than revenue when you are selling. Smale describes that, “Experienced business buyers want to see profit numbers, not revenue.”
Last, make sure to evaluate your progress every few years and also recalculate your retirement needs to make sure the numbers still add up.
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