For many middle-market business owners, the American Dream of selling their businesses for financial security or turning them over or selling them to their children before retiring seems more distant today than it did 20-plus years ago.
A recent study by The Wall Street Journal and Vistage International shows that almost half of the 799 small-business owners surveyed plan to retire after age 65, with 38 percent saying they plan to retire later than they expected five years ago. For some, it’s a matter of choice, for others, it’s simply not possible to give up the cash flow.
Whatever the case, many business owners today are locked in a state of “analysis-paralysis” — not making any major business decisions related to transitions as they wait to see what happens with the elections, the economy and their businesses. Why aren’t they looking to sell now? This is what we’re hearing:
Uncertainty about the future. Although the Federal Reserve has promised to stimulate the economy if it doesn’t show significant improvement, the inconsistency of the recovery, combined with uncertainty about key issues like the tax laws, has many business owners feeling skittish and opting to postpone transition plans. Although many think business is OK now, they feel they might get better valuations in the future as the economy improves.
Low expectations of returns on investments. Fact is, while 20 years ago you didn’t question a financial advisor who said that you could expect to average 10 percent per annum on your investments, today you don’t believe that same advisor who says you can get five or six percent return per annum over a 10-year period. The past 10 years have been flat. You cannot price a business based on the income you need to live on or replace your income with the proceeds of the sale. Often, the choice boils down to either having to sell for much less than you think you deserve or having to make the decision to continue running the business in an ownership position.
Income needed to survive. Many business owners don’t want to part with their businesses because they still need the income to fund their lifestyles. As I’ve mentioned, you will never be able to replace the income of your business with the proceeds of its sale. The fact that people are living longer these days — well into their 70s and 80s — is contributing to the trend as they simply have a different approach to life and need the money to continue to enjoy themselves.
Others think their businesses are doing well, and they feel no urgent need to sell at present. According to the Wall Street Journal and Vistage study, more than half those surveyed say the lion’s share of their net worth is wrapped up in their businesses, so they don’t think selling and retiring is in the cards any time soon, mainly because they will not have enough income. Instead of retiring, some are now considering hiring someone to operate their businesses for them so they can retain their current lifestyles and cash flow while relinquishing some of their responsibilities and freeing up more of their time. However, this has inherent risks. For starters, you’re putting your biggest asset in someone else’s hands.
In the old days, most people looked forward to retiring in their late 50s and enjoying the final chapters of their lives with the equivalent of 60 percent of their income upon retirement. These days, with most people living longer and enjoying healthier, more active lifestyles, they’re lucky if they can retire in their 60s or 70s, and they also need the equivalent of 100 percent of their current income upon retirement to continue living their current lifestyle.
What many business owners are failing to see, however, is the bigger picture. While we should always keep an eye on the specific political, economic and legislative issues of the day, we must maintain a close pulse on the potential threats and opportunities and be prepared to take action when needed. It’s also critical to continue to adhere to the basic principles of “good business” that are relevant no matter who is in office or what type of economic cycle we’re in.
History is ripe with examples of companies that suffered major losses because they didn’t take the right steps to identify potential issues and seize opportunities that came their way.
Look at what happened to Polaroid: There are no more Polaroid cameras. Blackberry is going through something similar now, and some say the company should have been sold a long time ago. Same may go for Yahoo!, which didn’t sell when it had the chance at what in hindsight looks like a very favorable price.
Furthermore, while most business owners will agree that losing their biggest client could be devastating, many don’t take the right steps to prepare for this. I know of a local business owner who turned down a significant offer from a potential buyer, only to regret it about six months later when he lost his biggest customer and eventually went out of business.
Another topic to consider: Is the industry consolidating? If so, survival could require becoming bigger. Sometimes, you only get one shot to sell to the consolidator — and if you don’t seize the opportunity, it’s gone forever. It can change the competitive landscape.
Without doubt, you must always be prepared to seize any strategic opportunities that come along. The following advice is always good to keep in mind:
Plan ahead: Work with qualified legal and financial advisors to develop appropriate written agreements, such as shareholder or partnership agreements that include succession plans and buy-sell provisions. That way, you’ll be more prepared to act quickly when the need arises. Too often, opportunities are missed and/or these matters end up in court because people failed to plan in advance.
Establish an effective board of directors: Appoint members with the right mix of experience, knowledge and contacts who can bring good value to your board and won’t be mere yes men. Particularly for family businesses, it’s always good to add independent members who can help handle the important, potentially divisive, decisions.
Build relationships: Don’t underestimate the power of relationships, introductions and good advice from those in the business, like lawyers and investment bankers.
Be realistic: Whether you’re thinking of buying, selling, or staying put, don’t make rash decisions. Be realistic about your business, the valuation of your company and the amount you seek. Also, be realistic about the timing, as it will take longer than you imagine.
Indeed, new threats and opportunities will always present themselves no matter what’s happening with politics, the law, or the economy — and often, it happens when it’s least expected. The current “analysis-paralysis” that many business owners are stuck in can be a dangerous proposition if they’re not ready to react when needed.
If you’re one of those businesspeople choosing to take the “wait and see” approach, remember that not making a major business decision is a major business decision.
James Cassel is co-founder and chairman of Cassel Salpeter & Co., LLC, an investment-banking firm with headquarters in Miami that works with middle-market companies. www.casselsalpeter.com