A new seminal study on the net worth of small business owners illustrates, using comprehensive statistical research, what many of us have assumed for years: Entrepreneurs are woefully underprepared for retirement, and many, if not most, have unreasonable valuation expectations that their businesses will fund their retirement years. Sadly, many are not aware of this situation.
The study by SBA senior economist Jules Lichtenstein is entitled “Financial Viability and Retirement Assets: A Look at Small Business Owners and Private Sector Workers” and is probably the most comprehensive work I have seen on this topic. I recommend that every business owner read it because it is clearly a wake-up call for entrepreneurs.
Sell the business. That sums up how many small business owners hope to fund their retirement years. They are “significantly less likely” to have diversified retirement assets than employees do, increasing their financial vulnerability as they get older, according to a new analysis(PDF) from the Small Business Administration.
Take a look at that paragraph again. Per the SBA study, business owners who have risked EVERYTHING to fund the growth of their businesses, quite often have a far less diversified portfolio than their employees do, and, in fact, based on our experience, most entrepreneurs have nearly all their financial legacy tied up in one asset—the business. Many, being less than sophisticated when it comes to wealth management, are completely unaware of the danger of this predicament, and this hazard is compounded with the fact that most have NO idea what their business is worth. Or even worse yet, business owners have a flawed idea of their companies’ values based on some vague industry ratio that they heard at trade show years ago.
Mr. Lichtenstein has clearly exposed the seriousness of this situation in his study:
“There is a risk of significant consequences if the business goes bad. There’s a double-whammy if something happens to that company because you’ll lose your income and your retirement assets.”
To this I will add a sad triple-whammy: You work for years and years expecting your company to fund your retirement only to learn as you begin to entertain offers from buyers that the value of the business is far lower than expected.
It is for this reason that Generational Equity, a leading M&A advisor for lower middle-market companies, strongly encourages all business owners with companies having revenue lower than $100 million to begin their exit planning process long before they decide that now is the time to sell.
Here is a critical point to consider: Selling your business needs to be seen as a PROCESS not an EVENT. What does this mean? It means that you need to first find out the value of your business in the market today and then secondly, in conjunction with advice from a wealth manager, determine how large you need to grow the company in order to reach your retirement goals.
As reporter Klein points out:
While many policies have been put in place over the years to encourage small business owners to accumulate savings in specially designed accounts such as SEP (Simplified Employee Pension) and SIMPLE (Savings Incentive Match Plan for Employees) plans, those policies have produced only minor gains…
Lichtenstein’s study shows that the owners of the smallest businesses, those with 25 employees or fewer, are significantly less likely to hold retirement assets and more likely to depend on home equity as their largest asset.
This is a looming tragedy awaiting many of the baby boomer business owners that are planning to sell their businesses and retire during the next 10 years or so. Far too many have done little wealth management planning, and since they have no idea what their business is worth, they are unprepared for retirement.
However, there is good news. With some planning, hard work, and the input and advice from both a mergers & acquisition advisory firm and a wealth manager, you can prepare your company and grow it so that eventually it is ready to fund your retirement.
As you know, there are lots of ways to successfully grow a business and make good money while doing so. However, not all the strategies for growing a company are the same as building a buyer ready business. In fact, sometimes the steps you are taking may be counterproductive for enhancing value in the eyes of a buyer.
A prime example of this is customer concentration. Quite often we encounter clients who are quite proud of the fact that Wal-Mart represents 70% of their revenue stream. They see that as having a stable, blue chip customer. Buyers tend to look at it another way: You lose that customer, you lose 70% of your revenue post-acquisition…very risky. So the answer is growing your business with Wal-Mart but also diversifying with other retailers. That’s not easy; it takes hard work and management, but it is key. Simply put, history shows that companies with little customer concentration can earn higher multiples than those dependent on a few customers.
Another example is having recurring revenue that is documented and contractual. Most business owners like to brag about the fact that the relationships they have with key customers is based on a hand shake and dinner at the country club once a year. Professional buyers are leery of such arrangements because once the current owner is gone, so too are these relationships. Again, companies with proven recurring revenue streams command higher valuations in the market – simple as that.
Now these are just two examples of the literally dozens of value-enhancement challenges we have seen throughout the years. Again, the good news is that if you hire an M&A advisor 2-5 years BEFORE your retirement, then you have ample time to position your company for an optimal buyer. AND you also have time to work with a wealth manager to come up with a comprehensive retirement plan.
OK, sure this takes commitment, some capital outlay (fees), and hard work. But the alternative is far worse. Don’t make the mistake of ASSUMING what your company is worth and what you need for retirement only to determine at the 11th hour that it is far too little. Don’t retire from your business and have your cousin Larry hire you. Plan ahead.
If you look in the mirror and honestly admit that you are woefully unprepared for the sale of your business and retirement, you need to meet with Generational Equity. Our services are designed to preserve and protect the generational equity that business owners have worked hard for years to grow (hence our name). To learn more about how you can prepare your company for your retirement, give us a call at 972-232-1193 or fill out a contact form and we will be glad to discuss our services, our workshops for business owners, and how we might be able to help you.
And special thanks to Jules Lichtenstein for so thoroughly documenting the situation many business owners are facing today: a lack of retirement planning.
Carl Doerksen is the Director of Corporate Development at Generational Equity.
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T.D., thank you so much! You are a great leader! I love how you are using your gifts and talents to better others. You are clearly a GREAT COACH! This 3 day session undoubtedly changed the future of our business, and very well may have been the sole catalyst to save my company, my health and my marriage! A genuine “thank you” from the bottom of my heart.Bryan D. Horn, Owner, Over Under Clothing
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I wanted to write you a quick letter to express our appreciation and our delight on the outcome of helping us through the process of our recent sale. We are very happy with the end result, and are very happy to be able to move forward with all of our future growth plans.Terry D. Wickman, President, Keytroller
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I would like to thank you and your firm, Generational Equity, for being our valued advisors in our journey.Bil MacLeslie, CEO, ipHouse
I am pleased that I was able to work with Andrew Byrd throughout this experience. From the first meeting we had in Minneapolis I felt that I was in good hands. His knowledge and expertise is second to none. He guided the process consistently throughout. I feel lucky that I was pared with Andrew and could not be happier that I chose Generational Equity to handle this major life event. Thank you Andrew and GenEq for everything!Eric Erlandson, Owner, Action Fastenings, Inc.
We thank you Eric and Generational Equity making our dream come true.Larry Moore, Owner, A Company Portable Restrooms
We are extremely pleased with the way Generational Equity handled the sale of our company. Your associates, Tom and Chris, did an outstanding job of getting us (me) through the process.Michael J Polarek, President, Paragon Packaging
Tom Staszak is one of the most professional people I have dealt with in my last forty years of business. You’ve got a great group of people and you have built a truly professional organization.Michael J Polarek, President, Paragon Packaging
Thank you again for all your guidance and support. Any company will achieve what they intend, if they have you on their team!Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
We knew it would be a difficult task to have someone really understand our business and our market, prior to researching a possible buyer, so it was imperative that we found someone of your caliber, with definite proven experience in this area.Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
I need to say an immense thank you to Don Ho for his stellar work ethic, attention to detail, and tireless effort. Also thank you to the whole crew at GE! Without you, Don could not do such a phenomenal job. We were shooting for closing and funding before the end of 2020, due to the uncertainty of the political landscape and taxes. I am happy to report we closed last week and will be funding tomorrow.Dr. Caty J. Catron PhD, RN, VA-BC – Owner, Vic The Picc, LLC
The help you provided us during each step of this process made us feel very comfortable and confident we were selecting the right approach to transition our Company.Andy Graham, Vice President, Modern Heating & Plumbing
Greetings Mike. Thank you for the captivating and compelling presentation you made at the Phoenix presentation last week. Over many years in business yours was the most informative and well-presented presentation, on any subject, that I have ever attended! Your energy and enthusiasm combined with your concise and captivating support of your positions with easily understood examples and data was compelling.Pete L.
We were happy to see the interest in our company and what we cherished has not just a valuable company but an important company to the communities we served in.Larry Moore, Owner, A Company Portable Restrooms
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