The value of your business is key to retirement planning
When it comes to planning for retirement, business owners face some unique challenges. For the majority of entrepreneurs, cashing out of their business IS their retirement plan. However, two statistics stand out: on average, the company accounts for 70-80 percent of their life savings, and the vast majority of business owners don’t have a clear understanding of their company’s value. Simply knowing the accurate value of the business is the underpinning of a sound retirement strategy.
As with many things in life, knowledge is power. Many entrepreneurs take a passive approach without much reason as to when and how they will sell their company. This approach is apt to leave a lot of money on the table. Or worse, when offers come in lower than anticipated, the result is often a delayed retirement.
To break this cycle, smart entrepreneurs plan for retirement by engaging in an “Exit Planning” process.
Step 1: How much do I need to retire?
Having a clear understanding of your funding needs should precede any retirement decision. While this calculation can be informal, a formal Financial Plan can often save a business owner from costly incorrect assumptions. Working with a professional, you’ll go through a detailed process to model major purchase costs (a vacation home, a child’s college fund), ongoing expenses, as well as the likely performance of invested assets. The net result: your magic number of what you need to retire.
Step 2: What’s my business worth?
This is where business valuation and retirement planning intersect. Consider this: for most entrepreneurs, the majority of their portfolio is illiquid (the business), so the next question to answer is “what’s it worth?” A formal business valuation not only will help business owners identify a likely market value for the business, but also identify any of the risk drivers and attributes that are influencing value.
Step 3: Plan and execute
Armed with the knowledge of what you need to retire, as well as what your business is worth, it’s time to make some decisions. If your total portfolio exceeds your retirement funding requirements… proceed to a sale! But in the event that you have a gap, it’s imperative to put in place a plan to increase value. For some business owners, this planning can take several years. Failure to actively address valuation issues and to bridge a value gap only leaves one possibility: downgrading your retirement to a lower standard of living.
Most business owners only get one shot at selling their business. Given the size of the asset and its likely relative value in a portfolio, it only makes sense to do everything possible to ensure a great exit and a comfortable retirement. The success of that great exit begins by answering two simple questions: what do I need? And what’s it really worth?
About the Author:
Dan Doran is principal of Quantive Business Valuations, a professional business valuation practice specializing in small- to medium-sized closely held and family-owned businesses. Doran holds the CVA credential. Contact him at [email protected]