You are finally at the point in life where you are considering retirement. With all the work you have put into your business, retirement is a welcome sign. You are done, and you want to step away and cash out on your investment: you are ready to sell.
But is selling your business and retiring the right move? What if there was a way you could still own the business, not work in the business, and make more money than if you sold it?
Selling and Retirement: They Are Actually Two Different Things
Many business owners think the only way to properly retire and not keep working in their business is to sell and wipe their hands clean. If they were to hang onto their business, they believe they’d be working in it until their grave (which for many is less than ideal).
However, this doesn’t have to be the case. In fact, this solution generally brings in LESS money than if they were to keep the business. But how can you retire and still own your business?
Pete and His Story: Selling His Business and Retiring Wouldn’t Have Been Enough
Pete was the owner of an asphalt paving company that specialized in parking lots and residential driveways. Over the years, he’d grown “Pete’s Paving” from a one-man operation to four, three-person crews. In a 30-mile radius of Baltimore, his company was known for quality work at a fair price.
On the eve of turning 60, Pete was starting to think about his next chapter in life, so he wanted to talk to us about signing up for a free valuation with a large “mergers and acquisitions advisory firm.”
“I’m curious about the value of my business,” Pete said. “If I could get $3 million for it, I’d take it and run.”
“How did you come up with that number?” was our first question.
“Well,” Peter responded, “if you invest that for me and get a return of 5%, Martha and I can live on $150,000.”
“Before we talk return,” we responded, “have you thought about the taxes on a $3 million pay day? At current tax rates, you’ll pay up to 37% to the IRS and over 5% to the State of Maryland. In a rough estimate, that takes about $1,260,000 off the top. Then the broker will take its cut, there will be legal and accounting fees . . . “.
“Stop!” Pete interrupted. “I didn’t work this hard to walk away with less than $2 million. Maybe the company is worth $4 million or $5 million?”
“Maybe it is. We don’t know. We also haven’t figured out whether you and Martha can go from your current income of $500,000 to $150,000 per year and live the way you want to for the rest of your lives. But let’s take a step back. Let’s ask whether it makes sense for you to sell at all.”
After a long pause, Pete asked, “What are you suggesting? That I run this company until the day I die?”
“Yes and no,” was the best—and we admit, cryptic—response. “What if the best way for you to enjoy a financially secure retirement and do the things you want to do every day is to continue to own the business?”
“You’d have to make an airtight case,” responded Pete, “because that’s what Martha’s going to need when I tell her that instead of retiring, I’m going to keep working.”
“If we set this up right, Pete, you won’t be working every day or even every week. You’ll still be the owner and continue to draw the same income and distributions that you always have.”
“Now you’ve got my attention,” Pete said. “Go ahead. Make your case.”
Ask Yourself: “Financially, Should I Really Sell My Business and Retire?”
Just like Pete, most owners quickly come to find that the cash they walk away with after the sale of their businesses is much less than they anticipated: taxes and fees add up quickly. Even with a large multi-million-dollar sale, will you net enough to be able to retire?
Can You Reasonably Survive Off of Only 30% of Your Current Income?
The bigger issue that most owners often don’t consider is that the amount of income they’ll earn from their sale proceeds is nowhere near what they are currently earning. In Pete’s case, he was taking home around $500,000 each year in income, distributions and perks.
When we put pen to paper and showed Pete that to generate that same level of income, he would need a diversified portfolio of about $12,500,000.
You Mean I Need Tens of Millions to Retire with a Lifestyle that I am Accustomed to?
Your post-business nest egg will most likely need to be a lot bigger than you anticipate. Because your egg must sustain you for as long as you are likely to live, you also need to consider what is a reasonable amount for you live comfortably.
Did you work long, hard hours over the years to have to penny pinch in your retirement? Did you plan on any vacations or traveling during retirement? A comfortable amount of money for your lifestyle is different based on your personal goals but is also often overlooked after becoming accustomed to a certain income. Pete and his wife, Martha, were accustomed to a lifestyle of around $500,000/year. You may be perfectly fine at a lower yearly income, but you still need to consider what you can live off of safely.
During your retirement, you want to ensure you maintain a “safe” withdrawal rate. Depending on your asset allocation, this rate is normally between 3% and 4%. Using the numbers from Pete and Martha’s case, if they wanted to continue to live their current lifestyle ($500,000/year): 4% of $12,500,000 equals $500,000.
Retirement Strategy Options: Why Selling May Not Be the Best Option for You
This is just the starting point that brings people to think about their business retirement strategies. The great new is that you have other options!
As you near retirement age, you may have already realized other options were there but may not have considered the one we suggested to Pete: retaining ownership of your business. It is natural to feel pulled into the everyday of a business you built. But did you realize you can own the business and turnover day-to-day operations to a management team?
Stepping Back from the Day-to-Day into Retirement
If you maintain ownership of your business, it means you don’t have to sell your business. But how do you retire? You simply step out of the management of your business. You no longer control every decision and play a role in the processes, but rather, move into a position where you can “check in” on the business and leave working in or on the business to your team.
With this option, you can continue to earn close to the same yearly income, maintain ownership of your business, and still retire in a comfortable fashion.
The Catch: If You Don’t Have a Successful Management Team in Place…
Of course, this option is only realistic if you have management teams in place who can run your company successfully after you leave.
If you don’t have a management team in place, consider if you realistically have the time and energy to implement a management team. This means you will need to find, train, and mentor the right people on your management team. If you are looking to retire next year, or a health or life circumstance forces you to retire, it may not be realistic for you to have the energy or time to put into building that team up—and that is okay. It just means retiring with your business may not be the best option for you.
So, What Is the Answer–Should I Sell My Business and Retire?
Too often, the answer to this question depends on whom you ask. Had Pete gotten the business valuation from the “mergers & acquisition advisory firm,” he would have been encouraged to sell to a third party. Whether the sale proceeds would support Pete and Martha through retirement is usually not part of an M&A acquisition firm’s equation.
Your answer to this question should be based on your goals (financial and personal), your company and yes, even your personality. Don’t let your answer be biased upon who you ask. That’s why the process Obsidian uses to help owners consider all of their exit options is both owner-centric and successor-agnostic.
Every day, we help owners find the right answer to that important question: should I sell my business and retire? Create your retirement the way you need—you’ve worked hard enough you deserve it. Talk to a business exit planning strategist today!