When Will You Retire?

 When Will You Retire?


By Scott J. Storey

The answer to “When will you retire?” takes into account five factors and some number crunching for a theoretical future event. Planners have fancy tools to test the bounds of the question, and through a series of possible scenarios, can give business owners data points to deliberate. Those factors are:

  • Resources – assets
  • Income Requirements – future expenses
  • Rate of Return – the future growth of assets
  • Retirement Duration – number of years of retirement
  • Willingness to Retire – the likelihood to leave the workforce

For most business owners, however, the more difficult question to answer is, “What will you do with your business?” The irony of the question is that the preponderance of an owner’s net worth is typically tied up in the business, and its disposition has not been contemplated.

Ostensibly, there are four possible answers:

  • Give it, or sell it, to the kids
  • Sell it, or give it, to the employees
  • Sell it to a third party
  • A combination of all three

All of these take time to develop, particularly a sale to a third party. As such, it takes planning to discover the financial and emotional viability of each option, and align them with objectives to form “Plan A.”

There should also be a “Plan B,” should circumstances change. A myriad of life events could alter “Plan A” like death, disability, dispute, or divorce. “Plan B” ensures there is a strategy to address those possibilities.

Few business owners understand the range of liquidity and exit options available in today’s marketplace. The capital markets have evolved dramatically to serve the varying needs of owners of closely held businesses. Until recently, when a sale to a third party was contemplated, most were limited to one option: sell to a competitor. While this path works well for some and typically satisfies any liquidity desires, it often doesn’t address other, non-monetary concerns of the owner, most notably the future of the company, remaining family members and employees under the new owner.

The proliferation of financial investors during the past 10 years has changed the mergers and acquisitions (M&A) landscape and resulted in business owners having immense flexibility in how a liquidity event can be structured. Today, owners are able to effect transactions allowing for the creation of significant liquidity while still achieving other priorities including: keeping the company intact, protecting the interests of key employees and family members, or positioning the company for growth. Each owner’s situation is unique and working with a team of advisors including financial planners, investment bankers, attorneys and CPAs will define the retirement goals and understand the alternatives.

Well before the decision is made to execute any type of transaction, it is important to understand how investors attribute value to a company so owners can begin preparing early on for the eventual liquidity event. Even if an owner believes that a transaction is far off in the future, planning now can ensure taking full advantage of future opportunities. Many future sellers accelerate the decision to sell for a number of reasons, including changing personal dynamics and higher prices than previously thought achievable. Today’s M&A market is robust and acquirers are paying more than ever for quality assets. This has pushed up the liquidity timetable of many business owners.

It is never too early to think about how to properly position a company. While every company is different and a conversation with an advisor will help flush out specific issues, there are a number of common value enhancers that owners should think about well in advance of a transaction. These include filling vacancies in the management team, institutionalizing a robust financial reporting system, investing in professional financial statements, limiting customer and vendor concentration, and mitigating litigation or environmental issues.

To cleanly exit from the operation soon after a transaction, building a solid management team is essential so that the company is not too dependent on one person. Buyers are reluctant to acquire companies with management deficiencies or invest in businesses too reliant on one or two key managers.

Transparency is also an important value driver and there is no easier way to demonstrate that than by having an audit and strong financial controls in place. Financial reporting is one of the easiest issues to address to immediately enhance future value.

The decision to sell all or part of a business is a major life event that should be given careful consideration and undertaken only when the time is right. One common thread in all successful transactions is preparation well in advance of the liquidity event.

Author Scott J. Storey is a Managing Director in Investment Banking with BB&T Capital Markets.

John F. Ware, III is a Senior Vice President & Wealth Regional Director with BB&T Wealth. Both are in the Houston office of BB&T. Branch Banking & Trust (BB&T) is the 9th largest bank in the US, a leading middle market M&A advisor, and an excellent resource for business owners to assist in the preparation and execution of a sale transaction. JFWare@BBandT.com


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