“I can’t afford to sell my business … what am I going to do, work ‘til I die?”
I hear this way too often. Here’s the scene, a business owner is ready to retire and calls me about selling their business. I’ll review three to five years of financial statements and tour the business. In the course of this I’ll learn about the company’s product/services, its customers and organization. It’s not rocket science, it doesn’t take long to determine the company’s market value. That’s when the awkward conversation begins.
A couple years ago, I was called by a 67-year old business owner near Crossville. His company manufactures farm products sold via independent distributors to farm supply stores throughout the South. The first thing I noticed when I walked in his office was the messy pile of papers on both sides of his desk. “I’m gonna come in this weekend and deal with this,” he said sheepishly when he noticed me looking at the mess. He went on to tell me he’s had to cut back his work hours to look after his wife who’s been bedridden for almost two years. Since there were no children in the area who could help at home or at the office, he was having to do it all. I could tell, he was just overwhelmed.
“I was hoping my son-in-law would come back and take over the business, but he’s got a good job in Birmingham and can’t leave. I guess it’s just time to sell.” His business had peaked in 2007 just before the recession, and over the past few years, he’d worked hard to recover the hits he took in 2008 and 2009. He was almost back to where he was in 2007, but his expenses had gone up, especially his cost of distribution. Since he didn’t put much marketing money into opening new channels, he was basically stuck with whatever his distributors gave him.
The net effect was ugly. He only had a single-digit profit margin and working capital was a constant struggle. I told him I expected his business would sell for no more than three times last year’s pre-tax profit.
How I got to a 3x multiple is the topic of another blog post. Suffice it to say, if he could get 3X, after paying taxes and closing fees, he was going to put about two years earnings into his personal bank account. For a guy who’s 67 years old and in relatively good health, expecting to fund retirement by banking two years earnings is a non-starter. He literally cannot afford to sell his business as long as he is relying on the sale proceeds to fund his retirement.
This situation is not unique. I frequently talk with baby boomer-aged business owners who have not saved for retirement assuming they can live off the proceeds when they sell their business. When they find out those proceeds won’t fund their retirement, they realize they can’t afford to sell.
This business owner in Crossville had not done the little things that could help increase his valuation. Now, if he could re-engage in the business for another two to three years, I could help him get his valuation up to the point it’d be more likely to fund his retirement. But my experience tells me that once a business owner realizes the need to retire (in this case, the need to take care of his wife), it’s very hard to mentally and emotionally re-engage in the business. It’s a sad reality, I see way too often.
JIM CUMBEE is President of Tennessee Valley Group, Inc. a retainer-based business brokerage and transition mediation firm in Franklin, TN. Cumbee is an attorney and has an MBA from Harvard Business School. Jim is the author of Home Run, A Pro’s Guide to Selling a Business. https://www.amazon.com/Home-Pros-Guide-Selling-Business/dp/1599329239 . He has a wide range of corporate and entrepreneurial experiences that make him one of the most sought-after business transition advisors in the state of Tennessee. The principles above are true, but the story, names and fact patterns are changed to preserve the parties’ identities.
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