Ready to Retire? Your Five-Year Business Exit Strategy
If you're a business owner looking to sell and retire, it can take years to complete the process. Use this five-year timeline to prepare and stay on track.
Baby Boomers own about half of the private businesses in the U.S., and unless AI figures out a way for us to live forever, now is probably the time to figure out your succession plan.
Your sale may come a bit sooner than five years — no normal person plans things this far in advance. That said, this timeline is ideal for a business owner who is selling to retire.
Five years out: Set a vision
This is really a 20,000-foot view of how you want to transition your business. Start with internal vs external sales.
From just $107.88 $24.99 for Kiplinger Personal Finance
Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Internal successions include strategies like employee stock ownership plans (ESOPs), management buyouts and intergenerational transfers.
Outside sales can come in the form of strategic or financial buyers and IPOs.
The Kiplinger Building Wealth program handpicks financial advisers and business owners from around the world to share retirement, estate planning and tax strategies to preserve and grow your wealth. These experts, who never pay for inclusion on the site, include professional wealth managers, fiduciary financial planners, CPAs and lawyers. Most of them have certifications including CFP®, ChFC®, IAR, AIF®, CDFA® and more, and their stellar records can be checked through the SEC or FINRA.
Internal sales tend to primarily be driven by altruism. You want to pave a path for the next generation. You want the business to stay in the family. You do not want the biggest check possible.
External sales are often a function of necessity. That makes them sound like a bad thing. Perhaps the business has grown so big that an internal succession is not financially feasible. Maybe to continue to evolve, the business needs an influx of capital. Maybe your partners need liquidity to be able to reach their goals.
In terms of your own financial situation, I'd point you back to my column on the "wealth gap," The Most Important Number for a Business Owner Considering a Sale. Your financial plan will largely dictate which exit strategy makes the most sense.
That's where the concept of a "wealth gap" comes in — the difference between what you have and what you need from a sale to retire comfortably.
If your business must fill a big gap, an external sale may be necessary. If you're already close, you may have more flexibility to pursue an internal succession.
We rely on financial planning software to find that gap. You can access a free version of what we use online.
Three years out: Make sure the books are squeaky clean
Buyers will typically examine at least three years of financials in due diligence or before. Gaps between what you promised and what your books show are one of the most common reasons deals fall apart in due diligence.
Business owners tend to be visionaries much more than they are hyper-focused on the books. The fact that your books may be a mess is not a reflection of anything malicious — it's just the way you're wired.
It's time to bring in someone to clean things up and to keep them clean all the way through to the finish line.
Two years out: Build your team
Refer to my article The Six Pros You Need to Sell Your Business. You may not engage a business broker or investment bank two years out. You don't need an estate attorney to help you protect your newfound wealth before it is found.
However, financial planners can be a good starting point because, if they have helped people like you, they will likely have relationships with all the folks you need to talk to.
Looking for expert tips to grow and preserve your wealth? Sign up for Building Wealth, our free, twice-weekly newsletter.
One year out: Engage a business broker/M&A adviser/investment bank
Selling a business is not like listing a house, where you take a few pictures and it goes on the MLS. (Apologies if that's offensive to my Realtor friends out there.)
Your business needs to be packaged as a product. There will be pitch decks, maybe video and definitely a story that will be sold to prospective buyers.
There is then (hopefully) a bidding process, letters of intent and, finally, negotiation. You'll need the right firm to take care of that.
Reality check
This whole thing will be stressful. It should be. You are selling your life's work, and it's often worth the stress if it means finding the right buyer and ensuring your financial independence.
If you're planning to sell in five years and retire in five years, don't shoot the messenger here, but it's very unlikely that you'll hand over the keys and go home the same day you get a check.
There will be a transition plan and possibly an earnout period, depending on the type of business and the structure of the deal.
Service businesses have longer transition plans. In the wealth management space, they can span three to five years. The point? Let this article be the wind at your back to get started.
Related Content
- For Business Owners, Estate and Exit Planning Join Forces
- Why Business Owners Should Review Their Buy-Sell Agreements
- Why Your Business Shouldn't Be Your Only Retirement Plan
- The Four D's That Could Force You to Sell Your Business
-
23 Last-Minute Gifts That Still Arrive Before ChristmasScrambling to cross those last few names off your list? Here are 23 last-minute gifts that you can still get in time for Christmas.
-
The Rule of Compounding: Why Time Is an Investor's Best FriendDescribed as both a "miracle" and a "wonder," compound interest is simply a function of time.
-
4 Great Tools to DIY Your Own Financial PlanSmart Savings Several tools picked out by Kiplinger that DIYers can use to make their own financial plan.
-
The Rule of Compounding: Why Time Is an Investor's Best Friend
Described as both a "miracle" and a "wonder," compound interest is simply a function of time.
-
The 7-Month Deadline That Determines Your Lifetime Medicare PremiumsUnderstanding Medicare enrollment is crucial, as missing deadlines can lead to permanent late enrollment penalties and gaps in coverage.
-
If You're a U.S. Retiree Living in Portugal, Your Tax Plan Needs a Post-NHR Strategy ASAPWhen your 10-year Non-Habitual Resident tax break ends, you could see your tax rate soar. Take steps to plan for this change well before the NHR window closes.
-
Could Target-Date Funds With Built-In Income Guarantees Be the Next Evolution in Retirement Planning?With target-date funds falling short on income certainty, retirement plans should integrate guaranteed income solutions. Here is what participants can do.
-
Stocks Chop as the Unemployment Rate Jumps: Stock Market TodayNovember job growth was stronger than expected, but sharp losses in October and a rising unemployment rate are worrying market participants.
-
7 Ways to Plan Now to Save on Medicare IRMAA Surcharges LaterUnderstand the critical two-year lookback period and why aggressive planning before you enroll in Medicare is the most effective way to minimize IRMAA.
-
The Delayed November Jobs Report Is Out. Here's What It Means for the Fed and Rate CutsThe November jobs report came in higher than expected, although it still shows plenty of signs of weakness in the labor market.
-
The 'Best of Both Worlds' Rule of Retirement SpendingIt's the 4% rule on steroids. Here's what it is and why it may work for you.
