UPDATED: June 08, 2019
As the baby boomer generation reaches retirement age and ponder retirement plans, most of the 800,000 businesses owned by baby boomers in Australia will be at some point 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 deviated baby boomer retirement plans, if they had expected to sell their businesses to fund their retirement plans.
If you are looking to retire now, then you should have some fall-back plans should 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 (EBITPDA -- Earnings Before Interests, Taxes, Proprietor's Salary, Depreciation & Amortisation) . This may be the case when they bought it many years ago, but the going rate may be much, much lower, possibly below 1 times EBITPDA.
Sometimes the accountant may appraised the business at a higher price but the price that meets the market cannot be swayed. If the supply exceeds demand, then the price drops.
Let's agree firstly that that there is nothing you and I can do to control the market. Almost all baby boomers have the same desire to retire and cash out of their business at the same time thus prices have fallen and will continue to fall.
But what you can change is your mindset and the way you look at business valuation.
If you have had the business for many years now, you would probably have made substantial amount of profits from the business and paid back the cost of acquiring the business many times over.
Perhaps you paid a princely sum for the business, but that was the going market rate for the business at the time and you accepted the market price. Thereafter, you'd likely have profited from the business over the years and perhaps even have done financially well as a result.
Fast forward today. The market is different now. The prices of businesses for sale have declined sharply but this is 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 justifying to themselves a selling price that has no relevance to the free market (e.g. the price should reward their hard work over the years).
Actually, I believe this is matter of perspective.
If you had bought the business many years ago at the prevailing market price at the time, the business would have probably made enough money to cover your initial purchase plus many years of profit after that. The money you could make from selling the business is a bonus.
Actually, for buyers today, you should expect to recoup your initial purchase price from the profits over the years in business and still draw a rewarding income year on year. If you have to sell the business at the end to compensate yourself with perceived 'lost' salary, then this simply means that the business hasn't been profitable enough during the years. This could be due to a serious business error made in the beginning, or you lack the skills to meet the potential of the business.
For baby boomers that have built up wealth from the business, selling the business at the market price today (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 have the time to do the things that have eluded them for so many years.
Either way, the free market is not going to finch. Your business is extremely unlikely to sell for more just because you want it to.
If you own a successful business and fortunate enough to be in a financial position to retire, then you may have the luxury to exit at the prevailing market price. If your business is priced incorrectly, it could remain unsold for years (yes, years). And when you finally decide to accept the free market for what it is, the price may have fallen even further and you would have lost both time and money.
An employee will have Superannuation paid for by their employer. However, self-employed business owners are responsible for their own retirement and in theory should have set aside a portion of their net earnings or profits from the business as a nest egg.
But I appreciate that this may not be always be possible... 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 for chronic medical conditions, a divorce, a major health scare, another family crisis... the list goes on. And the money that you should have set aside for retirement plans is simply not there at retirement.
At retirement, selling their business is the only way to fund their baby boomer retirement plans. However, these baby boomers may be rudely shocked at the prevailing market price that their businesses can fetch. They are forced to work in their business longer because they simply 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 only solution.
For example, passing the business onto the kids or other family members will ensure a continuity of business profits, an annuity of sorts and allow the baby boomers to at least partially meet their retirement plans. Or perhaps lease the business to a third party for a steady rental income instead of profits.
Or perhaps look for outside help to transform the business, boost the turnover and increase its valuation so that the business could be sold for more. However, this is likely to take time, and for some baby boomers, time is simply something they don't have.
In any event, baby boomers may need to sober up to the truth that their retirement may not go to plan and some compromise may be required.
Here are some stories of baby boomers who failed to exit. This baby boomer owned a small takeaway shop near Museum Station in Sydney's CBD, and he wanted $150,000 for his business.
The owner claimed that the business was making approximately $190,000 net profit per year but being a cash business, this was very difficult to verify. The trading hours were very long (up to mid-night) and he had staffing issues. This made the business very difficult to sell.
While the asking price of $150,000 seemed reasonable against the stated annual net profit of $190,000, buyers today are far more harsher on cash businesses because of the perceived higher risk. The market price for this business would have been closer to $70 to $120K.
After a year unsold, his manager resigned from the business. The owner was forced to work in the business, and soon after he fell sick and had to take time off for urgent surgery and hospital treatment. Looking for a quick exit, he dropped the price initially to $39,000, and then $20,000, but no buyer was willing to take it on.
The owner then irreparably damaged his own business by closing early and sometimes not even trading on some days. Given the deteriorated condition of the business, this business could not entice buyers.
In the end, the baby boomer business owner was forced to shut the business down. Unfortunately 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. The owner risks losing his lease deposit and being sued for the balance amount owing from the lease term.
A year after the takeaway shop closed, a new retail concept shop now takes its place. The baby boomer business owner had failed to sell, failed to cash out, probably lost his bond on the lease and also probably had to compensate the landlord at a time when his health was failing.
While no baby boomers would want to think about ill health when they could be planning for happy retirement plans, statistics don't lie and failing to exit could mean serious financial pains.*
* The content is general information only and not to be relied on. The authors, contributors and website does not assume any liabilities or make any representations or warranties with regards to its accuracy > Contributors