Meeting with a financial planner is one of the first steps a shareholder should take when considering selling his company. Among other things, this meeting enables them to establish what type of retirement they can afford. Many are surprised when they realize that the returns they will get on the financial markets are much lower than the returns they are getting from their companies.
At this stage, many entrepreneurs put the brakes on and postpone selling until a time defined as “when I can no longer afford it”. The smaller the company, the more frequent this reaction. It's not so much a question of multiples as of the overall amount. Even at 3 times EBITDA, it's easier to retire with $10 million than with $1 million.
For many, giving up an average return of 20% a year (5 times earnings) to go and make around 8% a year (historical return on stock market investments in North America) is unthinkable.
For entrepreneurs, investing in the stock market is perceived as riskier than investing in their own SMEs. They know their business better and understand the risks involved.
The wrong calculation
Here's what many entrepreneurs say to themselves: “I'll sell for the same price in 5 years' time.” The reality is that time takes its toll, and very often the business of an aging owner loses value. Lack of dynamism, reduced investment, technological lags, delays in employee training, aging employees and declining profitability are all symptoms of a company whose owner is ready for retirement.
Often, shareholders who are nearing the end of their careers decide to postpone important projects, wanting to pass them on to the future buyer. The entrepreneur no longer wants to invest, as his or her return on investment (payback) must be made within a shorter timeframe, which in his or her eyes makes all projects riskier.
How much will the company be worth in 3, 5 or 10 years? Nobody knows, but in general, when managers have lost the desire to go further, this is reflected in the company's value.
Food for thought
To make an informed decision, several factors need to be considered:
How is my health?
What do I want to do?
Can I afford it?
Can my business function without me?
Can I cope with a minor health problem without losing customers or devaluing my business?
Can I reduce my time investment in the business?
Wouldn't it be better for me to increase the company's payroll costs to free up my time by delegating responsibilities?
Does my successor have the necessary tools to take charge if something happens to me?
Sometimes, entrepreneurs can no longer afford to retire because they've missed the right sales niche, fallen ill or lost a lot of value. They've traded a “more modest” retirement for “no retirement at all”.
Need help with business transaction questions? Don't hesitate to contact Galion Conseil.