TVG

“If you're telling me that's what my business is worth, what you're really saying is I can't afford to sell it. Thirty years of blood, sweat and tears, and that’s all you can get me, thanks.” Sonny (not his real name) was not in a grateful mood. His “thanks” was wrapped in sarcasm and frustration.

I was introduced to Sonny by his daughter who I know from church. She told me her 74-year old father was ready to sell his business and retire. She said his hip replacement surgery at the end of 2023 had taken its toll, and he had finally come to grips with the need to let go of his business.

Early in his career Sonny was a senior manager for a large manufacturing company based in middle Tennessee. In 1987, his employer announced they were closing the plant to move production to Taiwan, so Sonny decided to go into business for himself. All things considered, it had worked out well for him. The way he described it to me, “I put three kids through college, paid for two weddings, a boat at Center Hill Lake, and a couple nice trips to Europe. I guess you could say I've made decent enough money.” But we weren't meeting to talk about his past, we needed to talk about selling the business so Sonny could focus on his future. “Molly’s passing took the steam out of me,” he said, “I’m not lying, me or my business hasn't been the same since.” The financials told the same story. For the first 20+ years in the business, Sonny generated seven-figure profits, but the recession of 2008-2009 took a toll, as did his wife's death in 2011, then Covid took a hit from which he hasn’t fully recovered. For the past few years, Sonny was lucky if the business could make more than six-figure profits.

 Sonny’s dilemma is all too familiar. A business owner is at the stage when he/she needs to retire, yet their business doesn’t generate sufficient value to fund a retirement nest egg. In fact, I have seen few instances when an entrepreneur inadequately funds for retirement because they believe excess cash flow should be poured back into the business. The logic goes, focus on the business and it will fund the retirement nest egg.  Nice theory, I suppose, if the business value at the time the owner wants to sell is sufficient to fund retirement.

 Problem is, it’s rare when the entrepreneur controls all the factors driving the timing of their decision to retire. Fifteen years ago, Sonny couldn’t foresee the loss of his wife, a worldwide pandemic, or his need for major surgery. If he could have seen the future fifteen years ago, Sonny might have funded a retirement plan or maybe even sold his business when its value was the highest. But looking back isn’t going to help Sonny now. 

The good news is, for now the business can pay Sonny a salary commensurate with what he needs, including his health care coverages. But coming to work every day is taking its toll, as he said “I barely have the energy to see my key customers like I used to, and when I do, I don’t have much energy left to enjoy my grandkids. But I'm stuck here, aren’t I?”

 The numbers tell the story. Sonny’s business has a market value today of about $500,000. By the time he pays off his debts and accounts payable, Sonny is likely to clear about $375,000 and taxes are going to take another $65,000. So Sonny is looking at a retirement “nest egg” of about $310,000. Between Social Security and an assumed drawdown rate of 4% on his nest egg, Sonny is looking at monthly income of about $3,500. His monthly out-of-pocket health care costs about a quarter of that. Bottom line, Sonny is in a bad place, basically looking at the reality of not being able to afford to walk away from his business. He needs the income the business produces, yet he doesn’t have the physical energy or excess working capital to turn it around and increase its value.

 Sonny didn't ask me for advice on his options, he knew the answer … he doesn't have any options. He will continue to run the business and pull an income as long as he can. Though I didn't say it out loud, I knew that it didn’t have to come down to this non-choice. With some planning led by thoughtful advisors looking ahead of the curve, this might have been avoided.

 

Tennessee Valley Group

Jim is an attorney (non-resident status with the Missouri Bar) and though he no longer practices law, he has read and negotiated enough legal documents to fill a cargo tanker. He has an MBA from Harvard Business School and knows how Wall Street and private equity operates. Jim is a Tennessee Supreme Court Rule 31 listed general civil mediator with tons of experience helping business owners (large and small) work through sensitive problems to achieve winning results. He is the author of "Home Run, A Pro's Guide to Selling Your Business, Seven Principles to Make Your Company Irresistible."