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Can You Retire From Your Business On Your Own Terms? Here's How.

(SYDNEY) - If you are a baby boomer looking to retire, then you are not alone. 

The worst nightmare for any business owner is for their business to bite the dust and for all their employees to lose their jobs.  If you are a baby boomer planning to retire, then you’d want to exit the business on your own terms because doing so will help you to leave behind a positive legacy, take a pay-check as a reward for your years of hard work and leave the business as an on-going concern.

There are 800,000 baby boomers in Australia with a business so you can imagine the queue when they all want to get out of their businesses at the same time. Regrettably, not all will exit in the way that they want.

Previous clients are re-connecting with me to discuss the need to exit their businesses – excellent mid-market businesses with 7 figure profits.  They had brooded on this topic about 24 to 36 months ago, but it’d seemed that their desire to retire has taken centre-stage in their lives. They hear of friends and family kicking the bucket and suddenly the urge has morphed into an urgency. For some, chronic health issues are starting to beset them.

They can no longer put off the inevitable. For them, it is truly time to hang up the boots.

Often their children (usually comprising of Millennials and Zoomers) refuse to take over the family business because they see the family business as boring and lacking significance. It is said that Millennials and Zoomers seek significance and purpose to work and life, but the family business just doesn’t fit the bill, especially when they had seen first-hand just how hard their parents worked. So they say, thanks but no thanks.  

Fortunately, medium-sized and mid-market businesses have good 7 figures net profit or more, so these businesses are typically cruising – often the work is actually not that “hard” relative to a "9-5" job.

While owner-operators of micro and smaller businesses have to work in their own business, those who have mid-market businesses choose to work in the business when they don't have to. Mid-market business owners bring along with them a small business mentality and approach. This creates problems when it is time to exit – for instance, the owner of the business is being too hands-on in the business and the value of the business is intrinsically tied to the owner.

Hence, if something should happen to you, your family members will be forced to put together some kind of salvage operation to keep the business going but this is rarely ever good for the business. 

In 2007, I read about a 42-year-old mobile phone millionaire, John Ilhan who died after a heart attack one morning while on a walking track near his home. John Ilhan was the founder of Crazy John’s, an empire of 120 stores selling mobile phone plans and had more than 600 employees. Soon after, his wife sold her shares to Vodafone. Crazy John’s was a market leader in its heyday, and by 2013, Vodafone had shut down 40 Crazy John’s stores, and rebranded 21 stores to Vodafone. The brand was no more. 

 

Hence, if something should happen to you, your family members will be forced to put together some kind of salvage operation to keep the business going but this is rarely ever good for the business. 

 

I’d like to share five bits of wisdom so that you can exit your business on your terms and with a payday you deserve.  

 

1.     IT TAKES TIME TO EXIT 

Many business owners of all sizes see their businesses with tainted eyes, and severely overstate the positives and underplay the negatives. Because of this, they believe that if their business was on the market today, it’d be sold in 2 weeks with ease.  Unfortunately, this is rarely ever the case. It can take a good 12 months, or likely even years to sell the business.  It can take a lot of time to shape and prepare the business for sale.

A client who was in his mid-60s tried to sell his own business without the proper preparations and help. He was messed about by a buyer for 3 years. When time is the most precious commodity, you can't afford to squander it on experimenting with the market.

 

 2. YOUR BUSINESS IS LIKELY TO NEED WORK (Sometimes a lot of work)

Just as a dilapidated house needs a renovation before it could be put on the market, a business with “issues” that repel buyers will need work to shape up first. A dilapidated house is immediately obvious to everybody and the seller is nearly always in agreeance. However, a business with “issues” is often not that obvious to the owner.  In fact, business owners push back against specialist advice because they feel that there is nothing "wrong" with their business until they try to sell the business on the market and yield no results after a sustained period of effort and time.

Many business owners think that profits are everything. However, to buyers, risks (or mitigating risks) are equally important, as well as life purpose fit and work-life balance.

 

3. AUTOMATE AND DELEGATE

Many good businesses with 7-8 figures net profit are being operated like micro/small businesses. This means that these business owners are spending too much time working on tasks that can be delegated to others.  Not only are they slave to their own business, they are also killing the valuation on their business. They don’t have a system to automate the business because, in many ways, they are the system.

Business owners need to transfer their unconscious competency into a system that can be duplicated by employees.

For mid-market businesses, they are sandwiched between buyers looking to “buy” a job, and institutional-buyers/investors that are looking for bigger businesses with an independent management team. 

Financial buyers who are looking to “buy” cash flow or a job typically will spend less than AUD$1 million – sometimes much less. Although they love the 7-figure earnings (EBITDA), they just don’t have the funds to buy.  Meanwhile, institutional buyers and investors looking for returns are generally less interested in mid-market businesses because they are too small and too archaic to operate. 

Many of the buyers that are interested in mid-market businesses are actually other business owners. These Strategy buyers are looking to buy other businesses for their synergies and accretion to their existing business.  Sometimes Strategy buyers have too much cash lying around, and they are looking to put their funds into another business for immediate higher returns and growth. To pique their interest, your business will need to be largely automated where the owner is not working in the business, but working on the business. These types of buyers are not looking to buy more work. 

I have had many buyers with the funds to buy but walked away because the business isn’t sufficiently automated or delegated.  Financial buyers want a decent % yield return on their investment. They know that investing in businesses carries a higher risk than putting the cash in the bank, but they are happy to take the risk. But what they object to is “buying more work".   

If a business is automated, systemized, delegated to employees and/or fully operated by a Manager, the valuation goes up significantly because it is valued by buyers on its Return-On-Investment (ROI) . For example, a business with an annual EBITDA (earnings) of $1 million at the asking price of $4 million would represent a handsome return of 25% per year.   For an investor, it’s an awesome return for not doing too much. 

However, if the business is not automated where the owner works in the business, you may attract job seekers who are looking to buy a “job” for an income. 

"Job seekers" looking to buy a business for an income have limited funds.  Because of this, they are much more likely to haggle on price because they'd want to get their upfront investment back in the shortest time possible. This results in a lower Price/Earnings (P/E) ratio for the buyers, which is the number of years it would take for them to recoup their investment. In Australia, job seekers typically offer approx. 1.0 to 2.5 P/E ratio (e.g. $1.0 to 2.5 million price on a $1 million EBITDA). 

If you want a payday that you deserve for your business, then it is time to automate, delegate and allow yourself to let go of the business.

 

4. ALLOW YOURSELF TO LET GO

I get it. The business is your baby. But if you want to retire and exit from the business on your own terms, you must allow yourself to let go, and take yourself out of the business.

This might not be possible for micro and smaller businesses. However, if you are fortunate enough to have a business with enough earnings and profits to hire a manager of sorts to run the business for you, then do it.

For mid-market business owners, I feel that the push-back and resistance from this group is largely a mindset block.

They like to say to themselves:

“Nobody can run this business better than me”

“Other people will run this business down”

“Managers will scam me out of my money if I give up control of the day-to-day tasks”

“My clients only trust me, and no one else”

“Why would I want to pay $120K to hire a General Manager when I can do it myself”

“They can’t manage my employees like I can”

 

They (business owners) like to say to themselves:

“Nobody can run this business better than me”

 

Remember that every minute you spend working on tasks that can be delegated to somebody else, you are devaluing your business and making it much harder to find a buyer for your business. You are literally enslaving yourself in the business, much like the crew who are bound to the Flying Dutchman, a fictional ship in the film series, Pirates of the Caribbean. 

Allow yourself to let go of the day-to-day. You haven’t truly left the business. You are just taking the bird’s eye view – the type that buyers love too. If you prefer, our team here can also help you to automate and manage your business for you.

 

5. BE FLEXIBLE

When it comes to exiting their businesses, business owners can be incredibly inflexible and stubborn.  I feel that they see the business as their “baby” and as all “parents” do, they want only the “best” for their “baby”.  They won’t consider any proposal or sale structure that is a little out of left-field.

But some level of pragmatism and flexibility is needed. Not all buyers have the millions you want. And it is not possible for most businesses to have the Wall Street makeover that large institutional buyers like. In short, buyers are limited.  Supply is not. There are 800,000 baby boomers wanting to exit their business in Australia. The competition for buyers was already hot before COVID-19.

This is where business owners need to be flexible and be opened minded to proposals. These proposals may entail vendor financing, partial share sale, performance pay-out, staggered pay-out, a significant role for the business owner after the sale, selling a part of the business (and not others), re-structuring the business at the request of the buyer, the use of Option as a legal instrument and more.    

For one client we are currently working on, the seller is resisting an invasive probe (due diligence) by an interested party. To overcome this, we structured a proposal that uses a legal instrument called an Option.  

 

When it comes to exiting their businesses, business owners can be incredibly inflexible and stubborn. ...But some level of pragmatism and flexibility is needed. 

 

An Option is a legal instrument that allows (but does not oblige) the interested party to buy all or most of the shares in the company (business) at an agreed price (strike price) at a later date. This is a great tool to cement trust because the buyer can put up a small deposit (typically 5-10% of the agreed price) and thereafter, the business owner would allow the buyer to observe, participate and/or conduct due diligence in the business.  

The key takeaway is this: You will need to be flexible when it comes to all aspects of the sale. If you are willing, and with the right help, there is always a way for you to exit on your own terms. *

Josh Foo

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If you wish to reach out, please email me at [email protected]

Disclaimer: This article is general information only and may contain inaccuracies. No responsibilities are taken for any omissions, errors, or inaccuracies. There is no financial, legal, or any kind of advice being provided to you. You should seek proper legal and specialist advice on your own circumstances.