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 3 to 5 years of financial statements and tour the business. In the course of this I’ll learn about the company’s product/services, their 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.
I was recently called by a 67-year old business owner. 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 are no children in the area who can help at home or at the office, he is having to do it all. I could tell, he is 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 is now almost back to where he was in 2007, but his expenses have gone up, especially his cost of distribution. Since he didn’t put much marketing money into opening new channels, he is basically stuck with whatever his distributors give him.
The net effect is ugly. He only has a single-digit profit margin and working capital is 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, even if he could get 3X, after paying taxes and closing fees, he is not going to put much more than 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 with just two years earnings in the bank is a non-starter. He literally cannot afford to sell his business as long as he is relying on the proceeds from the sale to fund his retirement.
This situation is not unique. I frequently talk with baby boomer-aged business owners who have forgotten to think about funding their retirement or they’ve thought about it incorrectly by relying on expected proceeds from the sale their company to fund retirement. This problem is exacerbated when the business owner has not prepared the business for sale. This business owner has not taken basic measures to set his business up for sale, not even the little things that can make a big difference increasing the valuation multiple. If he can re-engage for another 2 to 3 years, I can help him get his valuation up to the point it’d be more likely to fund his retirement. But my experience tells me 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.
Moral of the story: Funding retirement through the sale of a business is a dangerous strategy.
Tennessee Valley Group
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