A common dream among private business owners is that, when they reach retirement age, the proceeds from the sale of their company will be sufficient to cover their financial future. Relying 100% on the proceeds from their business sale may be a risky proposition, because they are in effect putting all of their eggs in one basket, and not rounding out their retirement plan with other liquid investments.
In some cases, the business sale alone yields enough to retire on, but more often than not, depending on the sale of a SMB as the entirety of your retirement plan is not feasible. There are a number of factors to consider as to whether selling your business to fund retirement will provide enough money to last you through the golden years.
Variables such as how old you are when you retire, the lifestyle you prefer and if leaving an inheritance to your heirs is a priority will all play into the size of nest egg you will need. A financial advisor will ask these and many other questions to ascertain exactly what your financial needs will be in retirement. From there, you will calculate how much your business is worth.
Strategies to consider
How do you determine the amount you will get when selling your business for cash? Private businesses fetch an average of 3 to 6 times annual earnings before interest, taxes, depreciation, and amortization (EBITDA). And the average business has an EBITA between 7-10%.
While yearly gross sales can be robust, once you deduct all of these costs and place the lump sum of cash into a safe investment vehicle, the earnings may not be enough to provide long term income for your retirement. Even successful business owners need to pay attention to financial planning to make sure their retirement account is fully funded by the time they do sell their business.
When looking to fill out your portfolio, real estate is often a good option, particularly with respect to owning the business property in which your company is housed. During the time you’re occupying the building, you may pay rent to yourself, and after retirement, you can either keep the business property for an income stream or sell it.
Being sure you make the right moves
The prospect of selling your business should be only one aspect of putting together a plan that ensures you’ll be comfortable in retirement. The earlier you create a well-diversified investment portfolio the better chance you will have the revenue streams you need when the time comes. Working with a group of knowledgeable financial advisors for retirement planning will help secure your future.