IMPORTANT INTRO: I wrote the following story in 2016. A couple of weeks ago, I checked in with the client (Justin) to see how he was doing in the midst of this health crisis. At the end of the story, I’ll update you on the current status of his situation.
“I just came from my financial planner’s office and it seems I’m in deep trouble. I don’t think I can sell my business now.” Justin (not his real name) and I were meeting to review the strategy I had prepared to sell his company. He had retained me several weeks earlier, and the purpose of our meeting that day was to review the prospective buyers list I had developed.
But Justin’s recent meeting with his financial planner had taken our conversation a decidedly different direction. “I’ve worked with this financial guy for almost 10 years. So now he decides to tell me the proceeds from the sale of my business won’t be enough to fund the retirement Mary and I had planned?” I could tell Justin was quite annoyed, so I gingerly asked, “He knew you were selling the business, didn’t he? To which Justin said, “Well no, he and I hadn’t ever really discussed how my business fit into my retirement plan.”
I assumed he was exaggerating. I can’t see how any responsible financial advisor would ignore the value of a client’s business in planning for retirement. I said, “Oh that can’t be, I can’t believe your biggest asset wasn’t part of your retirement planning?” Justin looked away, obviously embarrassed and said, “The only time we ever talked about my business was about five years ago when he asked if I wanted to start a 401K plan for my employees. When I said I wasn’t ready to do that, he never mentioned my business again.”
So here is the problem Justin had just discovered. His business had a market value of about $5 million. After he paid off a small loan, and paid taxes on the sale and related closing costs, Justin was going to walk away with about $3.2 million. But when he told his financial planner he was planning to sell his business and have $3.2 million to put into his retirement account, the financial planner told him that given his low-risk investment profile, $3.2 million would only return about $100,000 per year. Given that Justin and Mary needed closer to $175,000 per year to handle their fixed and discretionary expenses in retirement, Justin was coming to grips with the reality he might not be able to sell his business and retire.
Justin was trapped, so we discussed his options. Option #1, he could proceed with the sale but significantly alter his retirement lifestyle expectation. Option #2, he could proceed with the sale and invest the proceeds more aggressively. Option #3, he could postpone the sale and continue to run the company hoping to increase its value over time. Needless to say, Justin (and Mary) were not happy with any of the options.
Justin has decided to delay his retirement, with hopes he can increase his business value over the next few years. Now here’s why I tell this story, Justin’s situation is not unusual. I have seen many situations when a business owner and his/her financial planner are not in sync regarding the business value as part of the owner’s retirement plan. One recent Sunday before church I was sharing this story with a friend of mine who is a financial planner, without divulging any of the names, and he said the reason this happens is financial planners don’t know how to help their clients increase their business value so they just don’t bring it up. My friend at church said it this way, “Let’s say a client wants to increase the value of an investment account from $100,000 to $150,000, the financial planner can give the client a number of ways to do that. However, the financial planner is generally not equipped to provide advice when it comes to increasing business valuation. Therefore, the financial planner just won’t bring it up.”
Business owners and their financial planners would be so much better off if they would seek counsel from a knowledgeable M&A advisor at least five years before the owner wants to sell the business. Getting the business ready to sell and bringing it to the point of maximum valuation is a win for everybody.
UPDATE April 2020: Justin is in the same place today as he was when I wrote this story in 2016. His business value hasn’t grown much the past four years because he hasn’t reinvested to grow the business. He, therefore, has the same problem today he had in 2016: he can sell the business, but the proceeds won’t fund the quality of retirement he wants. Like many baby boomer business owners, he might just have to keep working. I see this too often, I call it the baby boomer business owner’s straitjacket.
JIM CUMBEE is President of Tennessee Valley Group, Inc. a retainer-based business brokerage and transition mediation firm in Franklin, TN. Cumbee is an attorney and has an MBA from Harvard Business School. Jim is the author of Home Run, A Pro’s Guide to Selling a Business. http://www.amazon.com/Home-Pros-Guide-Selling-Business/dp/1599329239 . He has a wide range of corporate and entrepreneurial experiences that make him one of the most sought-after business transition advisors in the state of Tennessee. The principles above are true, but the story, names and fact patterns are changed to preserve the parties’ identities.