Thinking about retirement
The kid in me remembers a fall television program that was a one hour highlight of Notre Dame football games. The announcer was Lindsay Nelson, and as the show was a collection of excerpts of the most recent game, you would hear him making comments leading up to the next video snippet.
‘We move now to later action in the fourth quarter of the game’, was a phrase that I remember him saying. The appropriateness for this statement to the industry is that in addition to too many people deciding they want to retire and get out of the business, many of them do so far too late in ‘the game’.
Just as some football games have a two minute warning, your customers that are owners of shops need to think about something similar for their business. However, instead of something this short time wise, they need to be thinking about a ‘warning’ to themselves that is at least three years before when they want to leave.
For many the ideal scenario would be for one or more of the employees of the business to become the owners of the business. After all, they are the ones that should have the most knowledge of how the business works as well as being the ones that helped build the business.
However, as an owner works to keep expenses down, these expenses also include payroll for all including these prospective owners. At this point, where would these individuals get the money for a down payment, much less have other assets to be used as collateral for the loan?
Thinking of these potential buyers is going to require more advanced thinking than just three years. If the owner is going to sell to someone outside the business, let’s look at what needs to be happening during these final years.
We anticipate that over the many years of this business operation, there are many expenses that the owner has been able to make a part of the business. These would include things such as a vehicle, life, health and disability insurances, employment for family members and items such as a cell phone. These are some of the advantages of small business ownership; expenses that can shelter profit in the business.
Yet, when you come to the day that the business is for sale, the prospective buyer is going to want to do look at the p&l for the past few years. Now these expenses that have been a part of the business can work against the owner.
Taking the time to explain them to a buyer can cause that person to question how accurate the financial statements actually are. When this comes into play, the owner may find the buyer discounting the valuation for the business.
Logic states that the current owner of the business would do better to remove these types of expenses several years before the business is offered for sale.
While there can be several ways to value a business when it is put on the market, the two scenarios we have described indicate that the owner should not be getting up one morning and deciding to call a business broker.
The idea of jumping forward in the action may have worked for Lindsay Nelson and Notre Dame football, but it does not work in business. The entire game has to be played out in business, and for there to be a ‘win’ for the current year, there has to be a game plan from beginning to end.