01 Mar 2022 | Value Your Business Like It’s Your Retirement Plan, Because it Is.
Building a successful business can take decades. While working to grow the firm, it’s common to use all available assets above your salary to fund future expansion. Where does that leave you on the retirement side of things? For most business owners, the retirement plan is some form of exit and monetization of your business.
Most business owners follow this line of thinking:
- What’s the fair market value of my business?
- How do I sell? Private equity? Will my junior partners buy me out? Do I sell to a competitor?
- How effectively will the proceeds fund my retirement?
There’s a better way. Start with the amount of money you need to live the retired life you want. That’s your benchmark of the value you need to get for your business.
A new line of thinking:
- How much money do I need to fund the retirement lifestyle I desire?
- What’s the most efficient way to monetize & exit the business?
- What’s my target valuation?
A Different Valuation Metric: What Do You Need to Retire?
Creating a retirement lifestyle should be about your goals, dreams, and plans for what you want to accomplish in the next several decades of your life. It shouldn’t be about plugging a number into a glorified spreadsheet and then eking a life out of whatever income pops out.
- What’s most important to you in the early stages of retirement? Travel? Family? Starting another business? How much will that cost?
- As you age, what do you want your life to look like? Where will you live? How will you spend your time? Do you want to be able to help children and grandchildren? Do you want to devote time to philanthropy? What level of income do you need in these years?
- What will your legacy be? How will you fund it?
Once you’ve thought through what your retirement looks like, you can begin to think about the amount of money you’ll need to make that happen.
And there’s no online calculator that can determine this number for you. No quick formula. No rule of thumb. It takes a thoughtful, detailed conversation about your aspirations and needs to uncover what amount of capital you’ll need.
Increasing Your Value
You’ve been focused on the long-term growth of your business and are used to planning and taking steps to maintain an upward revenue and earnings trajectory. Value is a different mindset. You want to position your business to be the most attractive to a buyer, which means focusing on profits and tightening the ship regarding operations, processes, and more.
Increasing value breaks down to making improvements across several essential functions:
- Improve cash flow – get lean, reduce expenditures
- Increase profitability – improve margins from both cost and revenue
- Lower your risk – diversify & create recurring revenue streams
- Streamline operations – workflows, inventory management, payroll control, etc.
- Attract and retain high-quality talent – qualified retirement plans, cash balance plans, stock plans
- Build or refresh your sales/marketing process
- Get your books in perfect shape
If you’re wondering how you’re supposed to do all that while running the business, that’s where it gets interesting. You’re not. The sales process has a very truncated timeline. The value of bringing in outside expertise is correspondingly greater. Even if you could do all those things yourself, you can’t do them all at the same time.
Creating the Team You Need
The best approach to getting ready for a sale is to create a team that can work with you to systemize tasks, build a schedule to do it, and take the burden off your shoulders. Whether outsourcing or hiring in-house, you may need to create a working group of consultants – business, marketing, etc. – along with bankers, CPAs, and a legal team that can handle the transaction.
This is where the financial advisor, serving as the family CFO, can add significant value. As the quarterback of your financial team, they can look across the entire transaction to coordinate outside professionals. The advisor keeps your long-term wealth in mind, focusing everyone involved on the end goal of funding the retirement you desire.
The Bottom Line
The sale of your business could be the cornerstone of your retirement savings. When looking to sell, buck the traditional line of thinking and start with the end number in mind: How much money do I need to fund the retirement of my dreams?
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The information contained herein is intended to be used for educational purposes only and is not exhaustive. Diversification and/or any strategy that may be discussed does not guarantee against investment losses but are intended to help manage risk and return. If applicable, historical discussions and/or opinions are not predictive of future events. The content is presented in good faith and has been drawn from sources believed to be reliable. The content is not intended to be legal, tax or financial advice. Please consult a legal, tax or financial professional for information specific to your individual situation.
This content not reviewed by FINRA.
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