Recently I had an all too familiar business analysis conversation with a local residential home contractor. He said, “Chad I need your help. I have doctor’s orders that I am no longer physically able to do construction.” I said, “Great! Retirement comes in different forms, so congratulations! What is your retirement plan?” He said, “That’s the problem. Over the last thirty years, I put everything I made back into the business and I have no retirement saved and now no way to make a living either.”
This was so difficult for me to experience and I obviously had little to offer him at that point in his career. A gentleman who had done it the right way, for thirty years giving an honest day’s work for an honest day’s pay. However, he never thought that would equal the outcome he ultimately arrived at.
Another scenario is equally disturbing and sad to me. One of the first questions I ask a business owner when I meet to evaluate their business is, “What’s the end game? What is your transition plan out of your business in the next 5 to 10 years?”
The answer is almost always the same, “I’m going to put everything I have into this business and then at some point in the future, I hope to sell it and retire off the earnings.”
There are two fatal flaws which will predictably create the end result of my contactor friend if one chooses to follow the path of put all their resources and future in this business and “hope” that someone will cash them out.
Flaw #1: The number of small to midsize businesses being sold is incredibly small. In October 2016 Forbes released an article saying 90% of businesses will never sell. This is due to internal and external reasons. The reality is you may be waiting a long time by the phone for the right person to call with the right price. My experience is if the call comes, the business owner does not have his business performing near the level to adequately fund their future and not have to work again. They also don’t know their numbers and what the buyer is looking for and consequently become an easy target for selling below market value.
Flaw #2: Putting everything back into the business while it’s still growing means there is nothing being saved for an ultimate exit. Instead of growing a nest egg, you’re growing a dead end. At some point, whether we choose out or our mind/body chooses for us, we will be required to exit the business we started. Whatever you have in the bank at that point is your retirement.
Winning the game of exiting a business is all about stacking the deck in your favor. We do this by operating from a space of control. Focusing on what’s in our control rather than waiting and hoping our ship will come in. We have 100% control of every dollar that comes through our door. We should be getting paid first not last. Start taking your retirement off the top and putting it in a retirement fund that is difficult to get to. Then operate your business and hold your team accountable for managing to the difference. Ideally you should be saving 10-20% of your gross earnings to grow your eventual exit. Now you have a guaranteed transition organically growing your nest egg. Then if someone decides they want to buy your business and you can get a fair market offer because you are running on best practices and know your numbers. That is icing on the cake and you win twice!
If you can relate with my builder friend I mentioned earlier and know you are putting your future into someone else’s hands then maybe we should talk. How and when to exit your business should be one of the first things you address daily, quarterly and annually and should be the focus of daily performance.
Is your business performing at a level you can organically grow your retirement or possibly be sold for a large amount to comfortably retire? You will exit one way or the other, the question is will the exit be determined on your terms or by fate?
I’m excited to announce a new retirement calculator we have built for business owners that maps out the specifics of an exit plan and overlays your personal retirement contribution determining when you can retire maintaining your desired lifestyle with and without the sale of your business.
If you would like to get this information for your business and pre-determine your exit, just contact us and we’ll get you on the schedule!
To your profitable exit!
Chad Harward – Business Analyst