It’s fairly easy to set a date for leaving your business, whether it’s based on family needs or simply on the number of years you’ve been holding down the CEO’s position.
It’s also pretty straightforward to anticipate how much income you’ll need in retirement, although experience shows that most retirees find they need more than they originally anticipated, so always include a contingency in your estimates of the income required. You can also make a calculation of how much your company will be worth when it’s marketed, and hopefully have worked through all the financial implications with your financial advisers.
As an experienced business owner you’ll have an appreciation of profits and cash flow. They are referred to as the ‘lifeblood’ of a company and rightly so, as they will also have a bearing on when you can actually retire from your company. The first consideration when you’re looking for someone to buy your business is that they’ll be looking carefully at its profit and cash flow. The profit and cash flow generated by the organisation are what give the business its real value. To put it another way, buyers of SME businesses are reluctant to pay for ‘blue sky’ or ‘potential’; what they purchase is the reliability of a machine that makes money.
It’s profit and cash flow that will enable the buyer to justify to themselves, their advisors and bankers how much to pay you for the business. It’s equally important if you’re selling out to employees or expecting a younger member of your family to take over and provide an income flow for your years of retirement. The maintainable level and transferability of the profit and cash flow to a buyer is the link between the date of your retirement and your income in retirement because it underwrites the sale price of your business. When you look at the businesses’ financial position from this perspective it may well be that things aren’t quite as they seemed back when you decided 65 years of age would be old enough or 25 years would be long enough.
Not Attractive Enough?
If the businesses’ profits and cash flow won’t be sufficiently attractive to prospective buyers to get the price you need to fund your retirement, you may then have to do one of the following:
- Set a later retirement date
- Phase out your departure from the business more slowly
- Find a purchaser with cash instead of financing a relative into the business
- Find ways to increase the value of the business so it brings a higher sale price
- Reduce your retirement lifestyle expectations
An owner needs to understand the value of their business at its current profit level, the risks of the business and what its present market value is to decide if a sale at this value is sufficient for their retirement needs.
Jamieson can help you with pre-sale assessments for this purpose, and can also help you monitor that the business stays on-track for your preferred sale timing and price outcome.