Transitions 2020: Exiting the Business

Business brokers, wealth managers and other advisers say owners who sell their companies would be well-served to find new ways to make a difference, such as volunteering at a community garden or non-profit, or even consulting young entrepreneurs.

You’ve structured a deal, dotted the I’s, crossed the T’s, and you’re coming down the back stretch of business ownership. You’ve followed every bit of guidance from your lawyer, your CPA, your wealth manager, your insurance agent. You are ready to take the retirement plunge.

Or are you? Those trusted advisers may be experts in their respective fields, but you didn’t hire them to be your psychologist. The question you have to ask yourself is, are you truly prepared for the mental test you’ll face when you finally hand over the keys?

Being ready to make the sale means more than a simple transaction: It means taking on a new life with new interests, new schedules (if any!) and new depths in your relationships with spouse, family and friends.

You might surrender those keys, but there are ways to exit that business that don’t involve quitting cold turkey. You can do so, of course, but you can also structure the deal to retain a role as a full-time paid employee, as a partner stair-stepping out by selling off chunks of the business in increments, as a free-lance consultant or, if you’re selling to a family member, as a trusted adviser in your own right.

“It’s an emotional moment,” says Mike Anderson of Bridgepoint Investment Banking. “At one level, it can be a knife edge—do you wean yourself off the business, or are you physically just gone? The phrase I’ve used with some owners is, it’s tough, because you’re putting your kid up for adoption.” And the analogy isn’t far off, he says, because most owners—and no offense intended to them—have spent more time over the decades working on the business than they did with their own children. That’s often the harsh reality of business ownership.

A big part of the answer that owners must discern for themselves, Anderson said, is “One, do you have something to go to? A focus on what to do afterwards, as with philanthropy? Can you volunteer or take over as chairman of a non-profit? They need your leadership, and you need something to focus on.” Dreams of endless vacation sound terrific, until you start to deal with the hassles of travel, especially longer trips overseas. Many retirees find that the novelty wears off in a hurry.

“How will you spend your days?” asks Dan Danford of the Family Investment Center. “That is the million-dollar question. Every business is sold by a pessimist and bought by an optimist. Sometimes knowing too much holds us back.”

The emotional impact, advisers say, can be minimized in various ways. If your hobby is golf, perhaps, and you feel your business skills shouldn’t atrophy in retirement, maybe you want to start a company that specializes in producing custom grips or other accessories. The point is, you spent decades building a plan, refining it and executing it. Don’t go into retirement—which in some cases can cover two or three decades in itself—without a similarly strategic vision.

The exodus from the company will also depend on the “who” of your sale. If it’s to a son or daughter, or extended family members, you still have an emotional stake in the success of the company under new ownership. That dynamic probably doesn’t exist if you’re selling to a competitor.

Anderson cites the example of an owner who is still going to the office every day at 82, but has been telling his son for years that he’ll be turning the business over to him one day. “But because he’s never given his son meaningful control, the son can’t possibly run the business without him. There’s nothing the kid would like more than for Dad to move to Florida, but Dad feels like ‘he can’t possibly do as well as I did.’ ”

Not a good recipe for family relations going forward.

Ensuring your emotional health should take place in lockstep withsafeguarding your financial health, experts say.

“Some people are very vulnerable after they sell the company,” says Danford. “They have a lot of time and money and it’s easy to get bored. I treat it a bit like death or divorce … wait a few months or a year before making any big financial decisions.”

Another dynamic that can affect your exit plan: the underlying financial terms.

“Seller financing, if I’m the finance guy, I’m not going to leave right away; I want to make sure these guys don’t screw up so I get paid,” Anderson said. “If it’s private equity, you’re probably more confident they can figure it out, because they have a lot of money tied up in that business now. Who’s taking over really makes a difference.”

That becomes important the older you get as an owner. If you’re past 70 and starting to lose a step, you may be waiting too long, professionals say. There’s a chance a prospective buyer will try to wait you out, hoping the price will go down as you become more motivated to sell. Otherwise, you could try to offload it to a successive generation, but then do what? Hang around and be in the way?

The transition from business finance to personal finance is an important one, Danford says. “Business finance is mostly about cash flow and capital expenditures,” he says. “Personal finance is all about risks and rewards and making your money last. For some people, it’s the first time they’ve had real money in their pocket, and it worries them a lot.”

None of this, he said, applies strictly to business owners; anyone entering retirement will feel the effects. But it’s a different dynamic with someone who has to sell off a lifetime’s work.

“Retirement is a bit like the old high dive at the public swimming pool: terrifying, until you do it,” he said. “Then it is fine. The anticipation is way worse than the event. It’s something like sending your kids off to college. You give them a hug, wish them good luck, and you drive back home to an altered world. For better or worse, it’s a stunning new chapter.”

If you have a prospective buyer who lacks the means to acquire your business in a straight-up cash deal—perhaps it’s a family member—or with financing already in hand, one potential way to get the deal done is to bankroll it yourself.  Among the guidelines that can help protect your interests and cast a wider buyer net:

• Remember, you’re the bank. You should expect an additional return on the use of your money in the form of an interest-bearing loan you’re making to the buyer.

• You may be the bank on this deal, but you’re not a bank. So you can offer more lenient terms, which can help attract more prospective buyers, along with faster closing times.

• Your willingness to finance the deal demonstrates confidence that the company will continue to earn enough to retire the loan. Unwillingness to consider this option may indicate to buyers that you’re not sure about future profitability.

• Just as the buyer is executing due diligence on your company, you’ll do the same to make sure they know how to run a company and have an acceptable financial history.

• Terms: Loans generally run 5-7 years, at interest rates of 6-10 percent, and down payments of 10-25 percent.