Thousands of small-business owners from the enormous Baby Boomer generation are — or will soon be — faced with the prospect of selling their company as they move into retirement.
Before heading to the golf course or to hang out with the grandkids, those business owners have much to consider, especially if they’re going to maximize profit when it’s time to sell.
This “Silver Tsunami” is washing over the business world and won’t subside any time soon, according to experts. And the retirement of many business owners means opportunities for potential buyers.
“It’s the perfect storm for small businesses,” said Dave Garner, co-chairman and a certified mentor at SCORE Denver, a source of business mentoring and education. “This is absolutely a good time for sellers.”
Garner said if the lower tax rate for pass-through businesses proposed by President Donald Trump becomes law, it would create “one of the best opportunities to buy into a business I’ve ever seen.”
About 7,000 small businesses are sold each year in the United States, he said.
“One-third to one-half of those that sell will be in the Baby Boomer category,” he said. “We believe the numbers in Colorado mirror what we see nationally.”
Preparation means money
Baby Boomers need to prepare fully for the sale of their business, and start well before most think is necessary, experts say.
“We advise clients to start three to five years out, but many will start only a few months out,” said Certified Business Intermediary Rob Amerine of the FBB Group, a Front Range business brokerage company, in an email. “Owners should start putting together their advisory team early — starting with their accountant, business intermediary, financial planner and transaction attorney. There are basically five key factors — finances, assets (tangible versus intangible), real estate (lease/owned or online), operations and sales/marketing. Buyers are becoming more and more data driven, so each of these areas requires a deep dive to demonstrate that the business is ready to sell.”
Colorado Springs attorney JoAnn Schmitz, principal at Schmitz Law Firm, specializes in working with privately held small- to medium-sized businesses and startups. She said many clients make the mistake of not coming to her soon enough.
“The key thing is to write an agreement before mood and memory come into play,” said Schmitz. “It may cost more money to write something legally, but it’ll cost far less in the long run. I hear, ‘Oh, I didn’t think of that’ far too often. The biggest thing is to have a plan. To maximize the value of your business, take a look at it from the buyer’s context and make sure it’s in good shape.”
Amerine said many clients want to put up the “For Sale” sign long before it’s time.
“Many times we will advise not taking the business to market until certain things are done, such as increasing profitability to get closer to the seller’s price point, putting second level management in place, or making adjustments to the financials with their accountant to eliminate unnecessary adjustments and cleaning up the financials,” Amerine said. “Businesses with clean financials will typically get the seller the highest possible price.”
Proper valuation is key
Garner said SCORE worked with a potential business buyer where the seller valued her business at about $350,000. But when they finally saw financial statements, it was doing less than $100,000 a year since her husband had died.
“Our client decided it wasn’t valued properly and walked away,” Garner said.
Getting a legitimate valuation is crucial, he said.
“There is no substitute for an unbiased valuation of your business done by a professional,” Garner said. “The owner will overvalue some things and undervalue other things, like not understanding the value of having loyal, long-term customers or the value of some inventory.”
It’s also important to know how the bank representing a potential buyer views the business, Amerine said.
“We had a client who ended up getting a higher purchase price due to knowing how the business could finance with a lender, giving our client more options in the price negotiations,” he said.
That involved offering seller financing at 10 percent, which helped the buyer decide to finance through the bank instead, but at the seller’s asking price.
Business owners can consult SCORE in Colorado Springs or the Pikes Peak Small Business Development Center.
“SBDC is a great resource because it pools together the different types of advisor an owner really needs,” he said. “Each adviser will bring their own perspective, which allows the owner to make the best informed decision. A common problem we see is the business owner relying too much on just one adviser’s perspective.”
When a business owner is set to retire, it’s not just the sale of the business that must be considered, Schmitz said.
“They need to give thought to what they’re going to do after selling the business,” she said. “These are usually type A, hard-driving people and suddenly their identity is gone. They need to figure out how they’re going to spend their time now that they don’t have a business.”