By Casey Dowd
Baby boomers are increasingly hanging the “for sale” sign on their small businesses as they prepare to leave the workforce and enter retirement.
A recent survey by Pepperdine University and two trade groups, show retirement as the No. 1 contributor to business sales in the fourth quarter of last year and the first quarter of 2013. In the past, tax increases were the main driver of owners wanting to sell their businesses.
In the first three months of 2013, the number of small business sales that closed jumped 56% from the same time in 2012, according to BizBuySell.com, an online marketplace for small businesses. And as the economy continues to improve, brokers expect selling activity to continue to increase this year.
Boomers looking to sell their business and enter their golden years need to be prepared with the proper documentation, financial planning and professional help in order to make their exit and transition smooth, says Mark Tepper, CFP, president and founder of Strategic Wealth Partners in Seven Hills, Ohio.
Tepper has conducted extensive research with baby boomer entrepreneurs, particularly focusing on the challenges they face in planning their exit and personal finances, and he offered the following advice:
Boomer: When should you start preparing to sell your business and how?
Tepper: The sooner the better. Ideally, you should start planning for your exit the day you begin your business. If you do that, you’ll manage your business as an investment as opposed to a vehicle that supports your lifestyle.
However, since most people don’t do this immediately, we’d recommend that you begin three years prior to your desired exit date. That will give us enough time to optimize the value of the business while implementing various proactive wealth management strategies
Boomer: What considerations should be taken to determine the value of your business?
Tepper: Appropriately determining and continuing to build upon the value of your business can make a significant difference when it comes time to sell. There are common value drivers that reduce a potential acquirers’ risk or enhance the business’ growth prospects. These drivers must be considered in addition to several other key factors, including:
• Your EBITDA: Your company’s earnings before interest, taxes, depreciation or amortization is the cash flow figure that merger and acquisition firms typically work off of when determining the multiple they are willing to pay for the firm.
The smaller the firm, the more risk is perceived by a potential acquirer, so continuing to increase your EBITDA will lead to a multiple expansion.
• Quality of Management Team: The employees are among the most significant assets to a potential acquirer and a quality management team stands out as the most important within that group. Having a strong team in place will ensure that the transition is as seamless as possible for the acquiring owner, which is extremely beneficial in the process.
• Facility Appearance: The manner in which your facilities appear to potential buyers reflects how the business is run on a day-to-day basis. Ensuring that machinery is up to date, offices are organized and workspaces are clean will help in the selling process.
• Revenues Types: The type of revenue your business generates, either recurring or one-off is a key factor for an acquirer. Firms that generate recurring revenue—particularly that on a contractual basis—are perceived as more valuable since the revenue appears year after year.
• Concentrated Risk: Diversification is key to boosting value. One of the main aspects of M&A activity is evaluating the risk of a potential purchase, so if most of your revenue comes from one customer, one employee is responsible for the major processes or your business relies on a single supplier, it will impact overall value. A riskier business has a reduced multiple.
• Potential Industry Growth: Certain industries are considered fast growth, such as the technology industry, while others, like manufacturing, are considered slower growth. Understanding where your business is and what multiple is associated with your industry is an important starting point.
• Barriers to Entry: The better your firm’s value proposition, the higher the multiple on EBITDA. It’s important to understand what differentiates your firm from the competition and to know what prevents another firm from stealing your market share and eliminate these concerns to boost value.
Boomer: Is it important to identify key employees and to make sure they stay on board?
Tepper: Yes. Without them, you have no business. You would simply be selling your inventory. Providing them with non-qualified deferred compensation plans with vesting schedules can help to keep them on board after you leave.
Boomer: Should boomers look to outside help for guidance on their exit plan?
Tepper: Yes. You should build a proper team consisting of certified public accountants and financial planners as well as investment bankers that have experience selling businesses. Selling your business is likely be the biggest financial event of your lifetime—you don’t want to screw it up!
Boomer: What tips would you give boomers to help prepare for their post business sale life?
Tepper: Learn how to transition from success in business to significance in life. When you go from receiving 200 emails a day down to one almost overnight, you’re going to have to find something you’re passionate about to get you out of bed every morning. Whether it be family, travel, charity, etc., you should know the answers BEFORE you exit.