Baby boomers make up around one quarter of the Australian population, and they are hitting retirement age right now. For the business owners in this cohort, retirement planning comes with added complexity.
Retirement is a question that many business owner-operators will grapple with over the next few years. Our dominant demographic, the Baby Boomers, are hitting retirement age each day by the hundreds.
Around a quarter of the Australian population is part of this group of people, born between 1946 and 1965. This is a generation that has accumulated significant wealth and has grown accustomed to high standards of living.
So, for those that own and run their own businesses, and who may have been doing so for 30-odd years, there are some big decisions to make that will affect their ongoing quality of life in retirement.
For those business owners, the question of what to do with the thing that has provided them with their life’s purpose over a period of decades is not an easy one to answer.
Options for retiring entrepreneurs and business owners
Wind up the business
This is self-explanatory. If the business is not worth much, or if there are no parties interested in purchasing it, or continuing its work as a going concern, it may be necessary to wind it up.
It is not as simple as locking the doors and walking out, though. There are several legal and tax considerations when taking this option, especially if there are employees involved and if you are selling plant and property.
Sell the business privately
Businesses are typically sold on multiples of earnings. Expect to achieve an earnings multiple of two to three times when selling privately, depending on the business.
It is important to consider that when the business is sold, the owner will get a lump sum, but those profits that have come in over the years will cease.
So, is that lump sum going to result in a better long-term quality of life than the continued dividends from the business?
Acquisition by a larger business
Large businesses will typically pay a higher earnings multiple for the sale price than a private buyer.
We said above that a business may fetch earnings a multiple of 2-3 times in a private sale, but a big business could pay double that for the same acquisition.
Yet what these big businesses are looking for is systems, software, governance, and accountability.
If your business is not run professionally, with a corporate ethos, then it will struggle to find a large business that is interested.
Systems, governance and accountability mean many things, including clear position descriptions, strong and efficient processes, good staff, and strong vision and values.
For example, a large acquirer will be scared off if several family members work at the company, have ill-defined position descriptions and float in and out of the office on an irregular basis.
For business owners that have been working with staff that they trust and respect for several years, a management buy-out may seem like a solid option.
But it is notoriously difficult to get right. It needs to be fair, so the owner needs to get fair value for the business.
Often, the staff will not have the capital or borrowing capacity to fund the purchase, so the current business owner will provide vendor finance which the staff will pay back through the business’ profit.
The more entrepreneurial and ambitious staff may be inclined to start their own business in the same sector, rather than pay a large sum for an existing business. It is difficult to strike the right balance in this situation.
Just keep the business. Mum and Dad may have been running the company for 30 years, so consultants will be needed to assist in the transition to their retirement, which should be planned around five years in advance.
In this situation, the business will continue to be a cash cow, and Mum and Dad will maintain their equity in the business. At the end of the day, they can still sell if this doesn’t work.
While the dividends may not be what they were when Mum and Dad were managing the business due to additional staff costs, it could still be the best plan.
This option does have its difficulties. When the longtime owner-managers step back, staff discipline can lapse. Or if new management is brought in, there may be upheaval within the business if they are not as aligned to the staff needs as the owner-operators were.
The owners may also find it difficult to step back from the business, when they are still dependent on its earnings and profits.
Each of these options has its own pros and cons, and they come with far more complexity than described above.
Family can add another layer of complexity to the transfer of ownership of businesses, but the above options can be generally applied in any situation.
And if the business owner was smart enough to acquire the business premises, then that can provide a continued revenue stream in retirement, even if the business is sold.
Whichever option is taken, there will be numerous tax and structural issues that go with the succession planning to be considered.
If you’re thinking about your retirement options, call us on 07 5596 9070.