Selling Your Business to Fund Retirement

Many business owners plan to use their current business as their future retirement account.  What we mean by that is that most of a business owner’s net worth is usually tied up in the business and when it comes time to actually retire, one simply coverts that business value to a retirement income stream by selling the business and investing the proceeds in any number of financial vehicles.  Financial advisors or private wealth managers can help with the investment part, but how does a business seller maximize the value of a business and plan for the sale?

Like most things in life, even when there is a “cookbook” or generally accepted process to follow, it will likely take one longer and have more variables (moving parts) than one expects. Here are some of the critical factors:

Timing – everyone knows the adage, buy low and sell high.  It is as true for a business as it is for real estate, securities and most investments for that matter.  But if it is that easy, why is timing one of the most difficult things to optimize?  Certainly there are many factors.  Among them are the condition of the economy, the competitive landscape, the regulatory environment, and the time to transaction.

We all know that the economy goes through cycles.  It is clearly better to be on the recovery or upside of a growth market cycle, like now.  While the length and magnitude of business cycles are undetermined, the current direction is clear.  If the Fair Market Value (FMV) has been determined and the business marketing package is ready, then the owner should move forward without hesitation.

In terms of competition, the first wave of baby boomers turned 65 last year, and every day a business owner waits, thousands more are doing the same analysis.  One does not want to be looking for buyers when the supply of available businesses may increase over the next few years.  More choices for the buyer will mean a longer process and lower prices for the seller.

America is a country with increasing government regulation at all levels – federal, state and local.  Complying with rules is an increased cost.  Why lower a valuation by absorbing these expenditures?

We know from experience that it can take a year or more to consummate a business transfer.  Business owners need to factor this into their plans.  Start early!

Confidentiality – Many business sellers do not realize the leverage that is lost when there is a breach in confidentiality and it becomes known that the business is for sale, or “on the market”.  Suppliers are less likely to extend credit.  They tighten the terms and watch the relationship with an increased focus.  They do not want to be left short.  Employees are also in a bind.  Their self interest becomes primary and any loyalty may be lost.  Finally, customers become concerned and seek alternative suppliers.  All of these relationships are better to be kept in the dark.  It will payoff at the closing.

Proper Representation – Selling a business by its very nature is an adversarial endeavor.  The seller wants to realize as much as possible and the buyer wants to pay as little as is necessary.  So how does one resolve this problem? The SBA says that most businesses will not be able to be sold due to poor representation.  At a minimum, a qualified business broker can reduce tension and acrimony between the parties.  It is a business transaction and “nothing personal”.  No truer words were ever said.

From the seller’s perspective, a proper business transfer needs to have a:

Valuation (Appraisal), Blind Profile (Business Outline), Confidential Memorandum (Prospectus), Buyer Qualification and Confidentiality agreements, and an Offer to Purchase.  The most cost effective way to ensure that all of these documents are in place is to have a professional in your corner.

While there are other factors that can affect one’s ability to sell a business as part of the retirement planning – such as family members, one’s ability and interest in training a new owner, or leased /owned real estate – we have covered some key factors here.

Recommendation: Start early, limit the number of people to a “Need to Know” basis, and assemble an expert team for the transaction, taxation and legal aspects of transferring the business.


About A Neumann & Associates, LLC

A Neumann & Associates, LLC is a professional merger & acquisition and business brokerage firm with 30 years of experience in New Jersey, New York, Pennsylvania, Delaware and Maryland that assists business owners and buyers with the business transfer process in a completely confidential manner. The company is affiliated with BBN, with 450 offices and access to a national network of qualified buyers and sellers. For more information, please contact A Neumann & Associates at 732-872-6777.

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