Do not sell your business, treat it as an investment
Many baby boomer business owners maybe considering what to do with their business after their retirement and many do not want to retire. We suggest that more business owners consider keeping their business rather than selling it.
Superior potential investment return
If you own a business that makes say $250,000 after market based salaries you may be able to sell it for around $750,000. Then you could invest the money in managed funds that may generate around 8% over time or $60,000. By selling your business, you have “lost” around $190,000 per annum.
The rates on return on smaller and mid market businesses are typically higher than other forms of investment, partially due to risk and lack of liquidity. However as you know your business, you may be more comfortable with your business as an investment rather than investments that you do not know the opportunity and risk profile.
Naturally these numbers are indicative and you must consult your financial adviser.
Diversification
Your financial adviser will ask you to consider the diversification of your portfolio, as having too much of your assets in a particular investment may not be sensible. It may be better for you to partially sell down to improve diversification.
I had a client that was considering selling their business. Instead they sold down 80% and kept a 20% ownership. Ten years later they sold the remaining 20% and made more money on the 20% than the original 80% they had sold.
Another client progressively sold their investment in their business over five years, to further diversify their assets as they moved further from the workforce.
Planning
For this strategy to be viable your business must be a suitable investment that can operate successfully without your day to day involvement.
The first two steps in this process are to develop systems and processes that enable the business to operate without you and train future leaders.
I like use the McDonalds analogy, McDonalds have developed systems so the restaurant can be largely run by teenagers. How would McDonalds develop systems for your business so that each process can be competently undertaken by many employees.
You will also need to identify, train and develop future leaders. You should allow 3-5 years for this process to occur. Future leaders must have the technical skills, have access to appropriate mentoring and coaching and then practice the art of leadership. These future leaders, like all of us, will make mistakes along the way, as that is how we learn. What process do you have to allow future leaders to fail in a safe way, without damaging your business.
Endeavour has a future leaders program to assist in developing the next generation of leaders.
New shareholders
We usually encourage your senior management team to become shareholders in your company and these employee shareholders may be joined by outside investors. Endeavour has a pool of investors that are keen to invest in unlisted smaller and mid market companies. These investors can provide you with some liquidity as well as supporting your management team.
Peter Wallace
Endeavour Capital
Sydney
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