At some point we will all retire. That will look different for each of us. Retiring may mean working another full-time job without the business ownership. For others, it may mean just working part time or not working at all, enjoying each day as we wish.
There are many items to think through. Planning ahead is important and planning a few years out will be the best strategy. Let’s take a peek at the process.
Plan ahead to retire
Each situation is different. You will first need to decide if your business is salable. Many attempt to sell their business but are disappointed. That could be due to an unrealistic offering price. Maybe there is just not enough for a person to purchase to justify buying, rather than starting from scratch. When do you want to exit the business? Who are your potential buyers? How do you locate a buyer and market the business? How do you determine an asking price? Do you need marketing representation or legal assistance? Planning well ahead of time will help answer these questions and allow you to reduce the stress and maximize the value of the business.
Is my business salable?
Your business is likely to have something of value that others may want to purchase. You have an inventory of products and parts, equipment, knowledge, and experience (with yourself and perhaps employees). You also have customers and clients. A customer is when you sell a product once or infrequently to the same person or organization.
Clients are especially valuable as they are individuals or organizations that purchase on a regular basis. With these sales, an ongoing client relationship is formed. Loyalty is key and is built after many years of doing business together. These organizations may be corporations, government or military, schools, nonprofits or sports leagues. A good, ongoing, and loyal client list is likely to be your most valuable asset.
Newer, relevant equipment also has value. Experienced and knowledgeable employees, as well as your willingness to train a buyer may also be important to a sale. Don’t overlook a shop or store location. You may own or rent, however, the location and facility features can have a large impact on value. Are you near a significant number of client or potential client organizations? Do you have plenty of well-organized workspace? Assess all your assets to determine if they are valuable. We’ll cover how to determine an asking price shortly.
Potential buyers
The ideal sale is to an experienced employee. Next in line is selling to an established business in the industry or at least one that has some overlap with your product sales. If there is not overlap, having a similar client base that they can sell additional product offerings to is a reason for them to buy your business. Newbies to the industry, and especially those that have never owned a business, are viable, but this type of buyer can come with a significant set of challenges and risk of failure.
If you don’t have employees that may be interested in or capable of buying and running your business, you may still seek to take the sales route. This is where planning well ahead of time especially pays off. Seek out a new employee who is interested in buying the business or at least has the potential. You should be willing to have an open discussion about this in your interviews and share this information with all your employees after the hire, if not before.
Marketing your business
Marketing your business for sale may be oriented to identifying the right new employee. It could also include meeting similar business owners in your region that might have an interest. Or selling your business could include advertising. Networking allows you to connect with potential employees, businesses similar to yours, or others who may know of an interested party. Networking organizations and your local chambers are a great source.
Where my business was located, all the competing shops knew each other and worked together at times. We shared parts and products we each needed quickly. This made it easy to pick up the phone and ask if they might be interested in a purchase down the road. In my case, it made it easy for a competitor to ask me if I was willing the sell.
You might also consider using a business broker. I considered this resource if the other methods did not identify potential buyers. I was lucky and had several sales opportunities without a broker or advertising. I planned several years ahead and kept my goal in mind at all times.
How much is my business worth?
You will want to consider the number, quality, and age of assets you have to sell. However, there is a basic formula often used for the sale of small businesses. It is one times annual gross revenues averaged over the past three to five years. If you have any extraordinary sales, such as a very large one-time sale to a client, this revenue is deducted from your annual sales for that year.
Adjustments to this number might include very new expensive equipment owned or an unusual length of transition training time requested by the buyer. However, this is a simple formula to calculate and for buyers to understand and relate to. If you are in a hurry to sell the business, a lower price might speed up the process. I do highly suggest getting legal assistance with your contract and the closing of the sale. You might also consider tax assistance as this can be a complicated subject to work through.
Buyer payment
Buyers can pay cash, borrow from family, a bank, or another source, or from you. Some combination is not unusual. Since the pandemic, small business loans are more available and at lower interest rates. If you are open to backing a loan, make sure you get a significant down payment. Understand that some buyers will feel less obligated to make payments to you than to a bank.
I suggest taking back a loan as a last resort. Use a lawyer for the loan and sale agreements as two separate, but coordinating agreements. Make sure the buyer themselves guarantees the loan even if a business makes the purchase. Getting back the business after a year or two because the buyer stopped making payments is not what you want. As long as they owe you money, stay in touch. Have a great planned retirement!
