Retirement Readiness for the Business Owner Preparing to Sell

Building a successful business comes with many responsibilities, questions and decisions. Preparing to sell that business might come with even more. And, the day to day duties of running a company can’t afford to sit on the back burner — you’re still CEO, owner, operator.

In our years helping business owners navigate this transition in their financial planning and wealth management, we encounter several common questions:

• • What is my business worth?
  • Can I do anything about the hefty tax bill when I sell?
  • Whom can I trust to care for my employees?
  • How will I spend my time?
  • Will I have enough to retire?

These questions, left unanswered, lead to several mistakes. But, with proper preparation, these are mistakes you don’t have to make. These are seven common mistakes and how to avoid them.

1. Rushing the Sale

Selling your business should not be taken lightly. It’s a complex process with many moving parts and should be carefully planned out. We like to have at least a three-year runway to plan. This time is used to execute a smooth sale with your transition advisors and to plan the tax, estate and investment strategies your financial team will utilize to maximize your net proceeds — strategies that might be missed with too short a runway.

2. Planning the Sale Before Planning Retirement

On December 23^rd, I was locking up and heading out for Christmas vacation when the phone rang.

“Hi, my CPA recommended me to you. I’m in the process of selling my business, set to close by year's end, and wanted to talk about how to make sure I’ll have enough to retire. Can we meet before the end of the year?”

These are important questions, and ideally you would ask them a few years, not a few days, before selling the business that has supported your lifestyle to this point. With days to prepare, we can explain what you can create with what you have. With three or more years to prepare, your financial plan can design the future you want. In addition to the myriad decisions related to a successful business sale, a comprehensive financial plan should help you answer the following questions:

• • How much income do I need to support the lifestyle I want for my family?
  • What do I need invested to provide this income, and will my sale proceeds fill any gaps?
  • What tax bill can I expect and what strategies can I use to reduce this?
  • What strategies can I incorporate into my sale to mitigate potential estate taxes?

Though this is not a comprehensive list, the answers to these questions will ensure you know where you stand in relation to your goals for the next phase of life.

3. Hiring Non-Experts or Not Understanding the Process and Players

A new client came to us after selling her business. Despite crossing this exciting threshold, she seemed disheartened. We learned that she sold on the second try, not the first. In the first attempt, she turned nearly the entire process over to a family friend, an attorney with limited experience in business transitions. As she put it, his over-conservative guidance led her to turn down her first offer. By the time she found a suitable second buyer, the economy had turned and the best offer she could get was nearly $700,000 less.

Carefully choose professionals who have walked this path before, and ask them three questions:

• 1. What experience do you have?
     Ask for prior experience in cases like yours. Your business broker, tax, legal and financial team, assuming they have worked with clients like you, can help you understand the process, what to expect and how best to prepare.
  2. What is your expertise?
     Our client’s family friend was operating outside his lane of expertise and it cost her dearly. Each member of your professional team should clearly outline what they will and will not do for you, given their capabilities.
  3. Can you work collaboratively with my other professionals?
     A team that can collaborate behind the scenes for you is worth their weight in gold. They can discuss ideas, evaluate and eliminate strategies, and fill in gaps as needed — all while you focus on the demands of everyday life.

4. Killing the P&L Right Before the Sale

In the homestretch, it’s common to lose focus on the fundamentals. Many owners inflate salaries, make purchases that don’t add to the bottom line and milk the business for every possible personal tax deduction they can find. These choices, however, can be bad news for your profit and loss statement. A significant reduction in profit not only reduces the current value but also can show a downward trend and mismanagement, especially if salaries and expenses are unreasonably higher than average for your industry.

Instead, think about these last few years like staging your house for sale. Tighten up expenses, push for growth, invest in areas that will increase value and carefully weigh the pros and cons of increasing deductions. An expert business transition team can help guide you in what to invest in and, more importantly in many cases, what not to invest in.

5. Overvaluing the Business

A business owner recently asked what he should do with the $10 million sale proceeds from his business. When I asked how he currently invested the proceeds, he said “I haven’t sold yet, but I’m confident that’s about right.” No valuation, just a gut feeling. After strongly recommended professional valuation, he learned he was likely to get closer to $5 million. His starting value was $2 million high, and he hadn’t factored in taxes. It was disappointing news, but far better to hear it now than in the 11^th hour of a sale.

An accurate valuation allows you to rest assured that your retirement plans can move forward as hoped. Consider these three elements when you include your business value in your retirement plan:

1. 1. Use a conservative, but reasonable valuation
      Ask for the range of expected outcomes and run financial projections using the conservative end of the spectrum. This adds a buffer to your planning and, if there’s a surprise in the sale price, it’s likely to be a good surprise.
   2. Don’t forget taxes and transition costs
      Your tax and financial team can give you a good idea of the expected net proceeds — the amount you’ll put in your pocket at the end of the day.
   3. When it comes to value, check emotions at the door
      If you’ve built a business you love, the idea of selling it for a discount won’t sit well. But make sure that your value perception reflects reality. Look at comps and valuation metrics – prospective buyers sure will. This way, when you hear the first offer, you’ll know if it’s right.

6. Building a Business that Can’t Run Without You

Sales, management, marketing, operations, HR — an owner without systems in place wears every one of these hats. If you run every department and team members function like order takers, Stephen Covey says you have a team of "go-fors," employees who “go-for this” and “go-for that” based on your direct instruction.

This is all too common in our own sector, the professional services world. The business has the owner’s name on the door, and he’s built a go-for team. But, if the business can’t run without you, your successor isn’t exactly set up for success, and value can suffer.

Instead, work to equip and empower leaders in your company. Key employees should understand the big picture and direction of the company and own their role. Remember, they will be the ones carrying your legacy forward under new ownership!

7. Having No Identity Outside the Business

Here’s a common tale. You love your business, but are exhausted by it, so you pursue a sale. The excitement of valuation, identifying and training a successor, and getting all the finances in line keeps you fully engaged throughout the process. Then, right before you cross the finish line, you ask yourself, “Without this business, what in the world will I do with myself?”

Building and running a business is more than a job, more than a career. It’s a lifestyle. It provides a distinct sense of purpose. Too often, all the focus is on the logistics of a transition without consideration of what will provide that purpose. You’re moving away from a major part of your life — what are you moving toward?

Craig, a member of our Alterra team with decades of experience advising business owners, encourages time diversification. Like a plan to diversify your financial investments, consider four areas of time investment:

• • Pick something that continues to engage your expertise and your business experience.
  • Choose and plan for a few specific hobbies or interests you haven’t made time for yet. It could be setting sail to long-awaited travel destinations or learning that song on the guitar that has always eluded you. Be specific and intentional.
  • Identify a cause you care about, something that allows you to use your time and talent to serve others. Few things fulfill the longing for purpose like service to those in need.
  • Invest in family. A weekly lunch with your grandson, annual trips with your kids, regular check-ins with parents or siblings — these are life-giving experiences and opportunities to pass on the values and lessons that have been most formative in your own life.

Selling a business is no small task. But when you consider these common mistakes ahead of time, you’ll set up your family, and your business, for a long legacy of success.

About the Author

Josh Whelan is a founding partner and financial advisor at Alterra Advisors who sees his profession as a calling, not just a career. His motive for pursing financial planning was very personal. While working on a degree in marriage and family counseling, Josh’s father was diagnosed with multiple sclerosis. Josh decided then and there to change career paths to help his family prepare for an uncertain financial future. Financial planning became his path to serving others.

Josh applies his passion for personal relationships and helping people thrive as a financial steward. His listen-first approach seeks to understand his clients’ true financial goals and then offer the open communication and guidance needed to reach those goals.

A native of the Pacific Northwest and a graduate of Seattle Pacific University, Josh serves many kinds of clients, but has established a niche helping dentists integrate their personal and practice finances. He’s also a regular lecturer at the University of Washington School of Dentistry, helping the school integrate financial education into the curriculum.

You can reach Josh at (425) 749-3300.

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