Baby Boomers Retirement PlansBaby Boomers Retirement Plans

Selling the business as a nest egg?
Baby Boomers should have other fall-back retirement plans

By Josh Foo

As the baby boomer generation reaches retirement age and ponder retirement plans, most of the 800,000 businesses owned by Baby Boomers will be at some stage on the market for sale, if not already.

This situation won’t improve for another 10 to 20 years.  In fact it will get worse.  The prices of businesses have been on the decline for more than 10 years now.   This has seriously put a spanner into Baby Boomer retirement plans, if they had expected to sell their businesses to fund these retirement plans.

If you are looking to retire now, then you should have some form of fallback planshould your business fail to fetch the necessary price to pay for your expected retirement plans, or if the business fail to sell at all.

Baby boomers often price their business at 2-3 times of net profit.  This may be the case when they bought it many years ago, but the going rate is closer to 1 times net profit today.

Sometimes, it is their accountant telling them how much the business should be sold, but the free market cannot be tamed.  If the supply exceeds demand because you have up to 800,000 extra businesses for sale on the market, the price drops.

Mindset About Pricing

Let’s agree firstly that that there is nothing you and I can do to control the business-for-sale market.  Almost all Baby boomers all have the same desire to retire and cash out of their business at unsurprisingly around the same time.  Prices have fallen and will continue to fall.

But what you can change is your mindset and the way you look at the business valuation.  

If you have had the business for many years now, you would probably havemade substantial amount of money from the business and paid back the cost of buying the business many times over.

Perhaps you paid a lot for the business at the time, but that was the going ratefor the business and you accepted the market price without blinking twice.   You’d have profited from the business and perhaps even became mildly wealthyas a result.

Fast forward today.  The market is different now.   The prices of businesses for sale have slided sharply but this is still the market.

Many Baby Boomers know that quality time at retirement is more important than money, but some are nonetheless fixated at recouping the cost of their initial purchase, or selling at their own perceived value (e.g. they have put so much sweat and toil to build the business up and ought to be ‘rewarded‘ with the right price).

Actually, I’d suggest that this is matter of perspective.

Rather than looking at the glass half-empty, a mindset shift is to look at the glass half-full.  If  you had bought the business at the market price many years ago,  the business has probably made enough money to cover your initial purchase and many years of profit after that.  The business doesn’t owe you anything now.  The money you get from selling the business is a bonus.

For Baby Boomers that have built up some wealth from the business,  selling the business at market price (even if it is not within expectations) and enjoying the golden years is a worthy trade off.  The truest reward for any business owner looking to exit is to do the things that have eluded them for so many years.

Either way, the market is not going to finch.  Your business is extremely unlikelyto sell for more because you want it to.

If you own a successful business and in a financial position to retire, then it could be wise to sell your business at the current prevailing market price.   This is because if priced incorrectly, your business could be unsold for many years (yes, years) and when you finally decide to accept the market for what it is, the price may have fallen further and you would have squandered both time and money.

Baby Boomer Retirement Plans On Hold.

Typically the average employee will have some form of Superannuation paid for by their employer.  However, self-employed business owners are responsiblefor their own retirement funding and in theory should have set aside a portion of their profits as a nest egg.

But I appreciate that this may not be always the case.

The kids’ private education.  The larger house in a nicer suburb. The Mercedes Benz in the drive way.  Helping out less fortunate relatives.  Cost of health care forchronic medical conditions.  A divorce.  A major health scare. Another family crisis.  The list goes on. And the money you should have set aside for retirement plans is simply not there at retirement.

For some, selling their business is the only way to fund their Baby Boomer retirement plans.  However, Baby Boomers may be rudely shocked at the prevailing market price and forced to stay in their business for longer because they can’t afford to retire on the proceeds of the sale.

For these Baby Boomers, succession planning or options other than a sale may be the solution.

For example, passing on the business to the kids or another member memberwill ensure the continuity of business profits and allow the Baby Boomers to at least partially fulfill their retirement plans.  Or lease the business to others for a steady rental income instead of profits.

Or alternatively find ways to boost the turnover and vis-a-vis the value of the business so that the business could be sold for more.  However, this is likely to take more time, and for some Baby Boomers, time is something they don’t have plenty of.

In any event, Baby Boomers may need to acknowledge that their retirementmay not go to plan and some compromise may be needed as a result.

The Nightmare Scenario

This is a nightmare scenario for a client of mine.

He is a Baby Boomer business owner of a small takeaway shop near Museum Station in Sydney CBD, and wanted $150,000 for his business.

The owner claimed that business was making approximately $190,000 net profit per year, but being a cash business, the turnover was difficult to verify, the trading hours were very long (up to midnight) and he had some staffing issues.  This made the business difficult to sell.

While the asking price of $150,000 seemed reasonable against an annual net profit of $190,000, Buyers today are far more harsher on cash businessesbecause of the perceived higher risk.  With 20-20 hindsight, the market price for this business was probably closer to $90-120K.

After a year on the market, the owner fell sick and had to take time off for urgent surgery and intensive treatment.  Looking for a quick exit, he dropped the price initially to $39,000, then $20,000 but no buyer was willing to take it on.

The owner had irreparably damaged the business by closing early and sometimes not even showing up for work due to ill health.  Given the plenty of choices on the market, this business could not appeal to buyers, even if the business was given away for free.

The Baby Boomer business owner was forced to shut the business down.  He had just signed a new 5 year lease with the landlord, which meant that the landlord is entitled to sue him for breaking lease and for the entire 5 years rent (if the premise remains unleased).  This not only put the lease bond paid to the landlord at risk, but his personal assets as well if his landlord decides to sues him.

(I have seen some major shopping centres charging $250,000 rent per year for a 70 sqm retail space.  If you break lease on a 5 year contract, then the landlord could pursue you for potentially $1 million.)

A year after the takeaway shop closed, a new retail concept shop now takes its place and re-opened.  The Baby Boomer business owner had failed to sell, failed tocash out, probably lost his lease bond and also probably had to compensate the landlord at a time when he is in bad health.

I appreciate that no Baby Boomers would be thinking about ill health when they could be thinking about happy retirement plans.  But the chance of a chronic or acute health issue rises with age.  But if your business depends on you, then failing to exit on your terms could mean serious financial pains.

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