I appreciate the pandemic has caused serious disruption to many businesses. Moreover, the current procurement problems in both employees and purchases, interest rate increases and inflation have set a new playing field. I see businesses that ought to have been and could have been sold in 2019 – the owners said they were not ready and wanted to wait for better times.
So how long do you wait?
The owners of small businesses, like you, have the choice about setting a “leaving date” as I will call it for want of a preferable word.
Timing needs to be looked at from two angles: personal timing and the business timing.
Let’s take the personal angle first: when you started out in business, at an early age, the value of your business was probably a small proportion of your wealth. You may have owned your house, with a small amount of equity, some life assurance and pension. The business’ value would be a small part of the total.
However, as you grew older, the business prospered, you took money out, bought a new house and funded your pension scheme. Meanwhile the business itself grew in value as you brought on a management team, worked less in it, grew profits, turnover and cash generation.
In your early 60’s the business may well stand at a much higher percentage of your wealth than it did 30 years ago.
So, the figures might run like this.
- Age: 30
- Retirement Fund: 39%
- Primary Residence: 60%
- Business: 1%
- Age: 60
- Retirement Fund: 8%
- Primary Residence: 12%
- Business: 80%
If this is the case for you or it is close are you relaxed about retaining this much of your wealth in such a risky asset?
The point at which you become financially independent; is the point after which your wealth is at risk.
So, when do you become financially independent?
The short answer is when you have enough income to enjoy your retirement. To keep it simple: say you require an income of £50,000 gross then you need income generating assets of £1.7mn assuming a 3% return. If your retirement fund is providing this at present, why continue to run the risk your other assets remaining in the business and decreasing in value?
If your retirement fund falls short of this need, then financial planning is required. There are routes to go down but first talk with your financial adviser. The pair of you can ascertain what the shortfall in your secure assets is by using a financial model. This will feed in capital expenses such as providing deposits for the kids to buy their home, buying a holiday home or whatever one-off expenditure may come along. The shortfall will be identified and the extent your business plays its part in meeting that shortfall either by providing additional funds or by the capital amount you may receive when you come to sell it.
So, in acting perhaps you should consider:
- Assess your retirement needs
- Does your wealth outside your business provide enough funds for that retirement including the one-off expenses?
- If so, why continue?
- If not, speak to a financial adviser:
- find out the value of your retirement assets and the income they will generate; where there is a shortfall – have a valuation undertaken of your business along with an assessment of its attractiveness to a buyer. The exercise will help to clarify the issues and options available to you.
- Where necessary invest in someone who can build value into your business, in the timescales required so it is worth the amount you require to fill the shortfall.
Turning to the business angle: Normally I would say timing is all important and luck does play a part. In this time, I believe luck is more important. If someone comes along and offers you a price that will give you or go along way to bringing you financial independence, then consider it very carefully. Will it be the only offer?
The warning lights are flashing. In a recent report by EY-Parthenon, The Oncoming Storm, there was a key indicator. The number of companies, that is large companies, telling investors their profits would be significantly lower than market expectations jumped to 66% in the first half of this year.
The cause of the concern is obvious; with inflation running a more than 9%, 58% of profit warnings in the second quarter of this year were down to rising costs
The other top four reasons given were
- Sales short of forecast: 38%
- Supply chain issues: 25%
- Covid-19: 19%
- Labour market issues: 19%
No doubt these resonate with you.
Moreover, the research showed the companies in the travel and leisure, retail and consumer goods industries were at the highest risk of posting warnings.
In normal times, when they return, say in three to five years’ time, it is traditional normal to advise business owners thinking of selling not wait until the top of the sales curve has been reached. Leave something on the table for the buyer. The sales process can take months. So, where your turnover is growing, aim to start the sales process at last a year before the top of the curve.
That was good advice, I am not sure how it applies today given someone in their 60s looking to retire soon. I know there is gloom and doom in the economic reporting, yet the reality is the situation is unlikely to improve this year. There will be niches and the temptation to diversify; be careful as these could destroy the value that is there in the business.
That is all well and good. Turnover in this time could have fallen and remain static. So, I believe the timing depends on other factors, the main one being can the business survive with out you? So, in terms of timing aim towards this.
So here is a simple help sheet to help yu decide on when is the best time to sell?
More reading, help and advice from Assynt Corporate Finance
Below you'll find links to other articles that offer help and advice about selling your business, what to look for, considerations and recommendations.
If you would like further help, contact us, we'd be only to happy to discuss your sale and can help if we can.