This article are provided for information purposes only, and are not intended as legal advice.


How long in advance should you plan your retirement before selling your business?

September 9th, 2009

You want to retire but if you own your own business, you need to plan your retirement several years in advance.  If you do not do any planning, you will not optimize the selling price of your business.  With the baby boomers getting older there is suppose to be $1 trillion of businesses sold in the next ten years.   If you are one of those businesses being sold in the next ten years, how do you differentiate your business from all the other businesses being sold?

 

When you sell a house now and five identical houses on the street are for sale, the house which presents itself the best will sell first.  Over the last ten years, house staging has become a large business in the residential real estate market in Canada and the United States.  This is a business where a house stager will make your house more appealing to the seller and depersonalize the house so that it can appeal to more people.  Basically you are taking a home and making it into a house, something that can appeal to more people.   In business, you need to do the same thing.  Not only do you have to tidy up the place and make it more presentable, you need to sell the business as the earnings are continuing to grow.

 

If you have no succession plans and you will be selling the business then you need to decide, do you invest more in the business to grow the business before you sell, if the business is stagnating and sales are not increasing, do you investigate the problem and make changes?  If you need to reinvest in the business to improve the business, you will incur expenses which will reduce your profitability for a few years.  This will affect the selling price of the business.  If you retire three years after the benefits of your expenses have taken effect, then you will have maximized your selling price.  If you sell just after you invested more capital into the business,then you will not recover your investment and the additional expenses of improving the business will reduce the profitability which in turn will drop the purchase price of the business.

 

In summary, you need to plan your retirement years in advance so that you can time the reinvestment and expansion of your business to co-incide several years before you retire because you want to take advantage of all the improvements you have made.  This is done by showing higher earnings for several years prior to selling your business.  Remember, many people use profitabilty of the business for three years to value the business.


Filed under: Planning your retirement — Gary Landa @ 8:52 am


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