Continuing our review of the six common mistakes that can destroy businesses, we now turn to the fourth mistake: procrastination about retirement and succession planning.
Answer the following questions to see if your company is vulnerable:
• Does the owner know when he or she wants to retire?
• Does the owner know how much income is needed in retirement?
• Does the owner want to be running the company full-time five years from now?
• Does the owner know how much control he or she must maintain over the business to ensure retirement income?
• Has the owner explored financing opportunities for key employees to buy the company in the future?
The more “no” answers, the greater the risk. How does your company look?
Retirement means different things to different people, but one thing is certain – you’ll need enough money to live on. That means figuring out a budget and knowing how you’ll pay for it.
If you don’t want to work forever, then you need a plan to fund your requirement. And if that means selling the business, do you have a ready, willing, and (financially) able existing employee or family member to take over? If so, you will want to make sure that there is a business left for him or her to run when you step down. If there isn’t, you’ll be looking at a strategic or financial buyer outside the company. Either way there will likely be a transition period where the current owner relinquishes the reins and phases out of the business.
As we noted last month, the absence of a clear succession plan creates ambiguity at best, and a vicious power struggle or inability to continue operating the company at worst. Take the time now to plan your retirement objectives and ensure the success of the business in the hands of the next generation.
All business owners invest in their growing businesses and hope that their hard work will ensure a comfortable retirement. But changing times, technological advances, and an increasingly global economy may wreak havoc on those plans.
In the next Business Killers vignette, a sleepless older man is sitting up in bed. His wife asks him what’s wrong and he confesses that he might not be able to sell his business to fund their retirement. Apparently a large international firm has entered the market and is buying up raw materials and undercutting prices. As a result, the prospective buyers that had expressed interest in his company have pulled back. And while he could sell out to the big international competitor, they would only give him about half of what he thought his company was worth. Any retailer who’s dealt with a big box store or a Wal-Mart entering the neighborhood knows that this scenario isn’t good for a small business owner. Now he’s kicking himself for not listening to his financial advisor, who has been encouraging him to diversify his assets instead of plowing all his money back into the business.
Future-proof Your Business
Two takeaways are worth noting. The first is what my friend Steve Bergman, a consultant with Teleconvergence, calls the need for “future-proofing” your business. Steve has developed a few maxims to help business owners understand trends that may affect their industry. According to Steve:
• if it’s wired, it will become wireless;
• if it’s fixed it will become mobile;
• if it’s wireless or mobile, it will become intelligent;
• if it’s intelligent, it will become shared;
• if it starts as a product, it won’t stay that way indefinitely; in turn it will be
• bundled, then
• interfaced, then
• integrated; then
• combined to become multi-functional
• then become firmware
• then become software
• then lose all identity and become an application or a service.
A Failure to Plan is a Plan for Failure
In the Business Killers example, it may not have been obvious that this particular international firm would get into the business, but it probably didn’t take a lot of insight to figure out that competition is always a potential threat. The second is that regardless of how successful a business you are running, you need to begin planning your exit strategy years in advance of the actual retirement.
Had our business owner heeded his financial planner’s advice, he would have set aside money to help fund his retirement from the outset, thus leaving him less dependent on a sale of the business. In addition, he would have been working with a business broker or perhaps a business coach or consultant to develop an exit strategy that might have avoided the “fire sale” that he is likely facing.
Again, a failure to plan has turned into a plan for failure. Don’t let it happen to you – whether you are just starting a new business or nearing retirement, it pays to talk with professionals who can help you realize the wealth that you are creating.
Whenever you begin to think about selling a business, it’s important to figure out why you want to sell. That might mean getting a pile of money, freeing up time, or finding something more interesting to do. Understanding the “why” can help you make better strategic decisions regarding how to structure the sale.
Sometimes the answer is obvious. If you’ve been running the same business for 30 years, or if health- or age-related limitations make it harder to keep up with business demands, then retirement may be a big motivation. If so, your goals likely will be to maximize the value of the business – which may take several years of pre-sale planning – and to minimize the amount of seller financing to ensure a secure source of retirement assets.
But retirement is not the only scenario prompting a business sale. Some owners experience friction with a partner and don’t want to continue working together. Others get bored and want to start a new venture. That’s often the case with “serial” entrepreneurs, who move from one business to the next. And some owners simply want more free time to spend with families or pursue other activities such as extended travel or community service.
Regardless of your particular reason, it’s important for a seller to be able to present a plausible explanation when marketing the business to prospective buyers. Buyers want to perceive value in the business they are spending good money to acquire. It’s not too early to begin thinking about your reason(s) for a sale.