Small business owners with retirement on the horizon face a massive obstacle.
It’s staggering how many don’t have enough retirement savings to continue their current lifestyle.
Let’s face it: owning a business has its perks.
But if you’re like most, selling your business will be the number one driver of your lifestyle in retirement.
For the rest of your working years, your number one priority should be maximizing the value of your
business at exit.
I will reveal how to eliminate the obstacle that stands in your way of a very comfortable retirement.
I buy and build great companies and speak to 8-10 business owners weekly.
I’ll let you in on a little secret the local business broker won’t tell you.
Your business is worth a lot more to you than it is to buyers.
Why?
If your net profit is under 2 million, a lender will determine the value of your business…
Not you, not a business broker, and certainly not the buyer.
Even if a buyer agrees to your price, if they can’t borrow at least 80% of the valuation, they’ll never pay what you’re asking unless you are the lender.
If you’re ready to retire now and willing to be the lender and take on some of the risk, you can exit at a high multiple of your earnings. Your willingness to be the lender assures buyers that you believe in the business’s future growth capabilities and that you believe they are the right buyer to grow the business.
If you’re thinking…
What if they go out of business?
Understand, that’s the identical question a lender is asking if they are going to give a buyer a loan to acquire your business.
So, if you want all cash, a lender must believe the value of your business will transfer to the buyer.
The truth is that buyers of small businesses need a lender to give them 80% of the money needed to close the transaction. Even if they can pay cash, why would they when they can use leverage to get higher returns?
Your company’s value is in direct correlation to how your business looks to a lender.
If you’re expecting someone to pay cash for your business, you could be in for a big surprise when it comes to the actual valuation of your company.
Lender guidelines dictate company value, so technically, you’re not selling to a buyer; you’re selling to a lender.
When your company checks all the boxes with bank underwriters, selling at your price and terms is easier because your company is set up to make it easy for buyers to get a loan.
Naturally, lenders have specific requirements that, when met, allow them to make safe loans that are often backed by the SBA.
When a lender feels that your company will likely survive for many years after the sale, they are highly likely to give a buyer a loan.
There are a lot of hoops to jump through to get a commercial business loan but…
There’s one thing that will prevent any lender from giving a buyer a loan to buy you out.
A high customer concentration.
Eliminate the customer concentration obstacle, and you’ll never have to worry about selling your business for top dollar.
Let me tell you about a couple I met with last week Friday.
Hank and Sally own a service business in central Florida. Of course, I changed their names to protect confidentiality. Their company generated just over $1.4 million in revenue last year, and they keep about $400K per year, and they’ve been making that for years.
They have a great lifestyle, but they’re tired.
Hank and Sally have worked in the business since 1991. Through all of the highs and lows, they’ve built a company that provides the lifestyle of their choosing. But they’re in their late 60s, and it’s time to slow down.
The honeymoon is over. They want to sell their business now. It’s time.
However, the problem they face is buyer financing. Even though they have a great business, if someone can’t get a loan, there’s less than a 9% chance they’ll EVER sell their business.
The main reason it’s hard for Hank and Sally to sell is that over 50% of their company’s sales come from one customer. Not too many banks are willing to take that kind of risk because what happens if that customer leaves after Hank and Sally are off sipping champagne in Tahiti?
Can a company survive after losing 50% of its business overnight? Most would fail.
Most lenders will not lend if any single customer accounts for more than 15% of the company’s sales, much less 50%.
So, what can you do if you’re like Hank and Sally? How can you sell a company when the vast majority of your business is with a small number of customers?
The answer depends on how much time you have before you retire.
If you have time, then I’d recommend you focus on building sales and marketing systems that attract clients. This will get you more customers and decrease the large customer concentrations, which assures the lender that you are not as dependent on one customer because you have a system that attracts new clients.
But be sure to measure performance. When I look at acquiring a business, I ask, “How do you get new customers?” If the response is word of mouth, that’s a big red flag that has to be addressed before a lender will open their checkbook. I want to know the exact cost of acquiring a new customer and how long it takes to recover that cost. It’s a beautiful number because once you know it, you can scale quickly.
You may be thinking, “Yeah, Dave, but I don’t have a clue how to build a sales and marketing system to attract new customers.” That’s not my thing.
Then hire someone who does, or there’s a good chance you won’t get anywhere close to what you think your business is worth.
Here’s the truth. Great sales and marketing systems can fix the customer concentration problem in 3-6 months, so it’s worth the investment if you have the time.
But you have to be willing to invest the time and money necessary to achieve success. One of the first things we do when acquiring a business is to enhance the sales and marketing systems and attract new customers in the first 60-90 days.
But what do you do if you want to retire now?
What can you do if you don’t have the time or patience to pay someone else to build a sales and marketing system for you?
What do you do if you want to retire now but want to ensure the future of your employees?
After all, like you, they committed so much of their lives to you and your company, and you sure don’t want to hang them out to dry.
If you can’t keep going, you have two options…
Option 1: Liquidate your assets, let your employees go, and close your doors.
Or
Option 2: Be The Bank.
Instead of getting all of your money upfront, get paid for your equity over time. Your legacy will live on and allow you to retire at a fair valuation to you and the buyer.
You can save a lot on taxes, too.
In almost every case, you’ll get a much higher price than you could through any other method.
If someone wants to buy your business and a lender says its value is nowhere close to the exit price you are asking, the best way for you to get your price is to let the buyer set the terms.
The terms are how the buyer intends to repay the debt. What I look for is a 2-2.5 x debt service coverage ratio (DSCR). This way, we’re never paying more than 50% of the profit to pay the note, which allows us the cash flow we need for growth and appreciation.
It’s an ideal scenario for a seller because the buyer makes enough profit to ensure the highest probability of repayment of the note.
I bought a service business in 1992 from Lloyd Warren, who financed the entire company.
Thirty-two months later, as I handed him the final payment, Lloyd said, “I never thought you’d make it, but I’m glad you did.”
Lloyd’s only other option was to close the doors. Lloyd had a life event with a family member and could no longer give the business the attention it needed to thrive.
Lloyd didn’t understand that the payments he agreed to were affordable enough that once I got the business where it was really making money, there was absolutely ZERO chance I would default.
So many sellers are overly concerned about their own risk and never consider the risk of their buyers. Unfortunately, many sellers often choose to close their doors instead of choosing a suitable successor who has the potential to provide them with income that continues long after the sale.
Isn’t income what you really want when you retire?
At closing, if you get all the cash, you’re likely to hand much of it off to a Wall Street fund manager with the hope that you’ll receive consistent income for years to come.
You can turn your equity into long-term cash flow when you’re the bank.
It’s the next best thing… You’ll sell for a lot more money, pay less tax, your employees keep their jobs, and your legacy will continue.
Think of it from the buyer’s perspective. If you’re not confident enough to finance the business, why should a buyer believe in it, especially if a lender has planted seeds of doubt with a lower valuation? Frankly, when a seller is the lender, the lender is providing assurance to the buyer that the business can live on and be profitable with new leadership.
Maybe you don’t want to be the bank; if you have a year or two to make your business attractive to a lender, you don’t have to be. But time is not on your side. Every week that goes by, you are one week farther from the retirement you deserve.
We can help you fill in the gaps so you can get a higher valuation at exit, usually 5 to 10 times the current cash value of your business. It starts with a confidential conversation. Don’t be fooled by business brokers’ promises of a high valuation. In most cases, they are not successful business owners because if they knew how to build great companies, they’d be buying and selling their own companies, not trying to sell yours.
If you’re approaching retirement and are thinking about selling your company, book a confidential call today. If I like what I see, I’ll give you an honest assessment and a great offer.
A comfortable retirement might be closer than you think.
About the Author: David Mulvaney moved to Florida from Wisconsin in 1987. He worked as a locksmith’s apprentice until 1992, when he acquired a locksmith company primarily focused on auto and residential services. By 1994, Dave converted the company to 75% commercial services and sold the company in 1998 for over 10 times the acquisition cost. Since then, Dave has owned or owns controlling interest in businesses in the following sectors: manufacturing, engineering, global distribution, home services, commercial services, e-commerce, SAAS, residential, and commercial real estate. His companies have grossed over 250 million in sales over the past 33 years.
Dave buys and builds great companies and advises entrepreneurs on how to exit profitably on their terms. To Book A Call, Go Here.