Research shows that, in many cases, up to 90 per cent of a business owners’ equity is tied up in their business. This is a problem if you own a business and plan to use that money you’ve invested to pay for your retirement years.
Unfortunately, according to Tom West – a leading authority for business brokers and the author of the Business Reference Guide – only 25 per cent of small businesses ever sell. Most are closed and sold for assets.
West breaks it down further: he estimates that only 20 per cent of businesses with sales under $500,000 with four employees or less and those with sales of less than $1 million which typically have five to nine employees actually sell. Companies with sales of $1 million to $2.5 million sell approximately 25 per cent of the time, and those with sales of $2.5 million to $10 million typically sell 33 per cent of the time.
And there’s competition if you want to sell your business. Twenty-eight per cent of owners surveyed by BizBySell said they plan to sell in the coming year, either due to retirement (52 per cent) or burnout (38 per cent).
How much can you get for your business?
According to the BizBySell Insight Report, businesses that sold for $1 million or higher in the last year averaged a .93 revenue multiple and 3.67 cash flow multiple. This means if your business made $40,000 at the end of the year, you might only be able to sell it for $146,800, plus your assets.
In light of this, I’m sure some boomers wish they had spent the last 35 years working for a large corporation or a government where they could walk away with a $1 million or more in pension over 25 years. Unfortunately, only a select few are entitled to those pensions.
If you want to be able to sell your business, you need to focus on the following areas:
- Increase your profitability. Nobody wants to buy a business that isn’t making money. I recently helped someone evaluate a business he might buy that had a low profitability rate. I suggested he walk away because, in reality, he was buying a low-paying job.
- Get the business to run without you. A profitable business that runs on systems, not on the owner’s sweat equity, is a lot more valuable than one where you need to be involved daily to make sure it’s successful.
- Start planning now. A typical business takes six to nine months to sell. If you’re in a remote location or have a business that’s marginally profitable, it might take much more.
- Be creative. Recognize that you might not get full value for your business if you don’t use some different strategies to sell it. We recently worked with a business owner whose first option for a sale fell through. He started thinking outside the box and came up with other options that might enable him to sell the business quickly and still get the value he needs to move on.
Selling your business is perhaps the most important factor in your successful retirement. Understanding what you can do to influence your success in selling your business can reduce your stress and help you set realistic expectations.
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