Tips on Selling Your Business as Retirement Approaches
Updated on Mar 21 2018
If you are a business owner who is thinking about retirement, read this interview with financial expert Christian Schiller, Managing Director at Cascadia Capital LLC, to get tips on timing your business sale in a way that benefits not only your finances, but also the transition to new owners.
Timing when to sell your business can be tricky. You have poured blood, sweat and tears into your day—and often evening and weekend—job, and now it’s time for you to enjoy some well-deserved free time.
While this is beginning to sound like a rock and roll song, the truth is that timing either a transition to new owners or the sale of the business will determine the outcome of the song; or metaphorically speaking, the success of your retirement. Entrepreneurs are some of the most hard-working, talented people with the drive and knack for a trade, but retirement can be especially challenging.
Financial expert, Christian Schiller, Managing Director at Cascadia Capital, can provide some insight.
Timing Is Everything
While Christian focuses predominantly with entrepreneurs and family businesses whose values range from $25 million to $500 million dollars, his tips can be overarching for many businesses. He discusses that timing and strategy are crucial:
“A typical client is worth $100 million. Are they saving enough for their future? Yes, but it’s tied up in their business. In fact, most entrepreneurs have at least 90% of their total net worth locked up in their business with limited cash outside the business. A way ‘to create wealth is to concentrate and a way to keep wealth is to diversify.’ Entrepreneurs need to be savvy when it comes to planning their finances and a successful future.”
Christian continues to discuss how many entrepreneurs concentrate all their efforts in their company from age 20 to age 60, then when they approach retirement, they need to diversify their investment portfolio and sell to gain liquidity. There are steps to take as retirement approaches. “Business owners need to diligently plan and time their retirement,” Christian notes. “Entrepreneurs should transition their businesses to the new owners for the sake of business, as well as their employees. Timing a sale to gain liquidity is also important.”
Retirement Tips for Entrepreneurs
Ideally, entrepreneurs should consider a strategic timeline over the course of their career and the life of their business. Christian provides some tips:
Start compounding interest in your 20s, or as early as possible. Interest over time is what grows your money substantially over time so you can start building a nest egg.
Set up a Plan B. Entrepreneurs need to be especially careful to have more than one retirement plan as it’s important to not have ‘all your eggs in one basket.’ If you have invested in your business, make sure you have alternative investments set up for stability purposes.
As you approach retirement, make sure you don’t “pour and reinvest” everything into your company. You need to be more conservative as you approach retirement. Less risk and a more balanced portfolio will help set you up for success.
Create a ‘succession plan,’ especially if you’re a small business owner. Small companies are very tied to an individual, so a transition of ownership plan needs to be in place, whether passing down a business or selling a business. Be careful to pick a buyer who will be good to your employees.
Increase your investment percentages aggressively between age 50 and 65. Max out your 401k and IRA(s), if possible, and take advantage of catch-up contributions. Research some of the 401k benefits targeting small business owners, if this applies to your unique situation.
Continue to rebalance liquidity, as necessary, as you don’t want to starve your company. Maintaining balance is really key.
Plan your business sale during a hot market, if possible, and make sure to cover your bases with all the legal documents. A sophisticated ‘Mergers and Acquisitions (M&A) lawyer’ can help with the logistics, and while it may be expensive, M&A lawyer advice is some of the best and most important dollars you’ll invest in making sure the deal is done right.
Take care of your employees. Give a gift of money, even if it’s not legally contracted as it’s a win-win situation for everyone and keeps everyone happy.
Timing a Business Sale as Retirement Approaches
Knowing when to sell your business can be especially challenging. Christian offers an interesting perspective on this topic.
“Now is the hottest market I’ve seen to sell your business in my 23 years of business – In this cycle. 2008 was the downturn, and the market came back roaring in 2016. Typically, there are 7 to 10 years in a cycle. Business owners who are thinking of retiring may want to sell either this year or next year, or consider holding on for another seven years or so.”
As discussed earlier, a succession plan is crucial. Business owners can’t just sell a business and retire as investors and buyers don’t want you to just walk away. There needs to be a one- to three-year transition to bring-in and train successor management. “It takes at least two years to mentor as a new leader, so you need to be mindful of that and start the succession process, ideally, a few years before you’re ready to sell,” notes Christian.
If you’re passing the business along to the next generation, keep these things in mind:
- Is this generation capable?
- Is this a good decision for both of you?
It’s important to make sure the next generation or successor has a genuine interest and passion in the business. “They need to be capable, otherwise it’s not in either of your best interests,” discusses Christian. “I have a client who is struggling. The owner’s sons want to stay in the business, but business is flat. In this scenario, it might be better to sell the business, pay taxes and collect profit. The owner can then give his sons some of the sale proceeds to reallocate into buying a more compelling growth business. This makes the family situation better as taking liquidity from the flat business with limited upside and redeploying that to a growth industry business creates more opportunity as well as diversifies the older generation assets.”
The Benefit of Having a Financial Advisor
Enlisting the help of an expert is always helpful. According to Christian, “Savvy financial advisors can help with pre-transaction planning and can also help maximize the gross to net equation as you want to minimize tax and maximize net proceeds. Professionals ask a lot of hard questions about what people want to do with their money, and this is important.”
Whether you want your legacy to go to your kids, grandkids or a charity, or you just want to have enough retirement income to enjoy a leisurely retirement, financial advisors help you now and down the road to set up trusts and portfolios for not only fiscal success, but also future happiness.
Financial advisors help educate you and support your morale. Christian discusses how a client referred to the importance of “’passing the grocery store test.’ As a business owner, hypothetically in your own town, can you run into people, customers, employees and feel proud about what you have done?”
A financial advisor can help set you and your future business sale up for success so that you have a clear conscience, can pass the ‘grocery store test,’ and enjoy the rewards of retirement.
About Christian Schiller
Christian Schiller is a Managing Director at Cascadia Capital responsible for new client origination, channel partner relationships, Cascadia brand and marketing, and mentoring our rising stars. Christian is also a very active participant and leader in the family business segment across the Pacific Northwest, working proactively with family business leaders to facilitate various strategic initiatives. With over 22 years of investment banking experience, Christian has closed over 100 transactions in a variety of industries across the U.S. and globally.
Prior to joining Cascadia in 2004, Schiller was Managing Director for Cook Associates in Chicago where he focused on private equity transactions with private and family held companies. Previously, he was Vice President of Business Development with Maxim Partners, a Chicago-based private equity group. Christian holds a B.A. with Honors in Economics from Carleton College. He is on the board of the Austin Family Business program at Oregon State University.*