How to sell your business for retirement

Sooner or later, everyone begins thinking of retirement. Yet only 50% of business owners have an exit plan. Scrambling at the last moment to deal with the prospect of retiring and leaving your business behind is no way to cap off a successful business career.

Financial considerations are also a factor. According to a study, almost one-third of UK business owners plan to sell their businesses to fund their retirements. Getting your valuation wrong or failing to plan adequately could mean not enjoying your silver years as you intended.

This guide discusses everything you must know about selling your business for retirement purposes.

When should you start planning a retirement sale for your business?

When you set up your business, you should have spent a long time working on the perfect business plan. Now that you are retiring, you should spend as much time as possible working out a retirement strategy. Selling the business will take time, and you must be fully prepared to make the sale as quickly and smoothly as possible. 

It is not unreasonable to plan for your retirement over several years. The more time you give yourself, the more time you can prepare.

In the UK, the average time to sell a business is nine to twelve months, assuming no snags. This figure accounts for the entire process, from valuation to completion, but may not include the process of readying your business for the market.

Ideally, you should set a retirement date and begin laying the groundwork two to three years before. Note that this is a ballpark figure; many entrepreneurs initiate the process even earlier.

Financial considerations when selling a business to retire

Everyone wants to sell their business for the highest figure possible. However, prospective retirees must consider whether the money they receive will:

1. Give them the retirement they want.

2. Last long enough.

According to the World Economic Forum, they are warning that the average person will outlive their money by a decade. In other words, people need to pay more attention to how long they will live and how much retirement costs.

Cashflow modelling, budgeting and speaking to a financial advisor are integral to visualising the future. Gaining these insights can help you wargame whether you can retire and what may happen if your business sells for less or you retire earlier. Ultimately, your target figure depends on how you envision your retirement.

What are the options for selling a business due to retirement?

Retiring entrepreneurs typically exploit two routes when exiting a business. Which one is right for you depends on your circumstances.

• Trade Sale – A trade sale is where you sell your business to another business, allowing a clean break.
  
• Management Buyout (MBO) – MBOs involve selling your share of the business to other shareholders. Typically, this will be members of your senior management team, but it doesn’t need to be.
  

As always, timing and building a strong management team to de-risk the acquisition will be crucial for selling your business for your desired figure.

Some of the key issues you must address in determining the best exit route include:

• Is there an obvious trade buyer available?
• How important is it to you to do right by your staff before you leave?
• Is maximising the price the primary factor?
• How attractive is your business as a proposition?
• What are the predicted timelines for each option?

How will these business sale options affect your retirement?

Ultimately, both business sale options offer a clean break from your business. However, trade sales may result in greater values. Many business owners who choose MBOs often sell to their existing teams at a discount to enable the brand to continue after they retire. On the other hand, MBOs involve selling to known entities, which can result in a faster sale.

However, trade sales vs. MBOs are essentially a matter of whom you sell the business to. How they impact your retirement depends on the money you receive in either transaction.

How to best prepare to sell a business for retirement

An estimated 20-30% of businesses fail to sell at all. Not selling your business could curtail your retirement plans entirely. Adequate preparation is essential for giving your brand the best possible chance of finding a reliable buyer.

Let’s discuss some aspects required to prepare your business for the market.

Prepare your team

Preparing your team means assembling a team to make your business “sale-ready” and keeping your employees in the loop.

Firstly, any business sale requires a team to cover all the bases. Typically, this will be a mixture of employees and third-party experts. Some examples of your sales team may include:

• Senior leadership members.
• Departmental heads.
• Solicitors.
• Accountants.
• Business sale brokers.

Bringing these people together ensures you have people who understand your business from the inside and experience from those who have participated in business sales before.

Furthermore, don’t forget those who have already made your business what it is today. This can alleviate anxiety and maintain the day-to-day function of your company.

Ensure your employees are fully updated and onboard throughout the selling process. This is especially important if you sell an existing business to a new owner, such as if a café is changing hands. Keep your staff informed and prepare them for their new employer. If they are comfortable and confident, the buyer’s transition period will be smoother.

Transition to the next generation

Businesses operating without the owner/founder are always more attractive to buyers. It’s the sign of a well-run business. If you’re a hands-on owner, it’s time to transition to the next generation.

Restructuring your company might seem unnecessary, but it is an important step. You want your employees to be able to work successfully without you, come up with great ideas, and follow their own initiatives successfully.

Starting earlier will mitigate disruption. Take it step by step to avoid causing chaos within your business and impacting its results.

Lock down your business

Transitioning to the next generation shows your business can succeed without you. Likewise, your business should be primed for the future. Examples of things that must be confirmed or updated include:

• Employment contracts
• Training records
• Company policies
• Staff handbooks
• Third-party contracts
• Corporate record-keeping compliance
• Register of members
• Property deeds
• Current and pending litigation
• Regulatory compliance
• Intellectual property

Like selling your home, first impressions are everything. Going the extra mile to ensure everything is in place for a potential buyer will make it likelier that someone will want to take your place.

Although not every buyer is averse to inheriting existing problems – and some people make careers out of buying troubled businesses – they will ask for a hefty discount. Not getting the price you want could result in changing your retirement plans.

Get a professional business valuation

Entrepreneurs are notoriously poor at valuing their companies. It’s impossible to objectively review your business and place a financial value on it. Preparing your business for sale means arriving at a valuation that strikes a balance between the authentic value of a business and presenting prospective buyers with an attractive deal.

Reach out to a professional valuation expert for businesses. Some companies will even get multiple valuations to arrive at a fair deal. Expect to defend your valuation and negotiate it during the sales process. This is why an independent third-party valuation (or several) is so powerful.

Some options for valuing businesses include:

• Asset valuation
• Liquidation value
• Earnings multiples
• Comparable companies
• Discount cash flow
• Book value

Which model works for your business depends on the industry, the nature of the business, and its function. Again, this is another reason to hire a professional to provide a business valuation.

All in the value

If you are not happy with your valuation, there are several approaches you can take to raise it. The most attractive businesses have reliable and consistent financial performance. If yours is less consistent than you would like, look at how to improve it. This plan may include introducing more short-term strategies which can be implemented purely to raise your company’s value.

You can also prepare for the long term. Write proposals for company growth over the next few years. While a buyer may have their ideas about what they wish to do with the company, they will appreciate knowing your vision and may include some of your ideas in their plans for the business.

Be realistic

Your business has been a significant part of your life for years. It is only natural that you are proud of it and want to achieve a sale that reflects your years of hard work and dedication. However, this can hamper your deal.

Take a step back and examine your business as a potential buyer would. Any problems you find will need to be fixed. Consult an independent advisor to help you through the process if you need help. Their insight will help you identify where you need to apply attention.

Even when you have attracted a potential buyer, there are still hurdles to be crossed. Do not get frustrated if a deal falls through. Selling a business takes time and patience. Remember, a buyer will want to scrutinise every aspect; if they find something they do not like, they can walk away without making an offer.

Invest wisely

You will need some good investments to keep you comfortable for the years to come. Now is not the time to take a chance with risky proposals. Buy shares in safe and stable options to keep you living the life you want to enjoy.

Remember that you do not have to sell all your shares to your buyer. You can remain with your company as a shareholder and continue to reap the rewards of the success you built.

Have a post-retirement plan

When some retire, they struggle with going from living and breathing their business to having nothing to do in their day. Look into new hobbies or activities that you have always wanted to do or revisit an old love. Sometimes, that still isn’t enough, so consider part-time volunteer work with a charity for stimulating and varied work.

If you were a partner in a law firm or an accountancy practice, remember there may still be work for you on an ad hoc basis. Your clients will have been coming to you for years and may be uneasy at the prospect of transferring to a junior partner. If you struggle with a lighter workload, this might present an opportunity for you to do the work you love while still enjoying the benefits of retired life.