How Much Is Enough?

Entrepreneurs start their own company so that they can build short and long-term wealth for themselves and their families. While we’re in the middle of it, there isn’t always a lot of thought about how much we need to earn today. We have a bunch of bills, kids that want to go to school, and discretionary purchases that are as unique as we are. We know exactly how much we need to live the life we want. But what about as we age and consider retirement? Do our needs change? How much is enough?

As a business advisor I hear a lot of owners talk about running the business as they see fit until they eventually sell it and use the proceeds to fund their retirement. Everyone golfs with someone that got an unsolicited offer, sold their company for a 15x multiple of EBITDA and has riches beyond their wildest dreams. This absolutely happens. And it happens just often enough to give people hope that it could happen to them. And it can.

Perhaps more often, a privately-held owner-managed company sells in the 4x to 6x EBITDA multiple range, and there are drivers of value in place that convince a purchaser that the EBITDA they’re currently seeing is sustainable. It takes strategy and investment to optimize a company’s operations so that they’re attractive to a potential buyer. It also takes a plan to understand the company’s current value, the financial needs of the business owner upon retirement, the timeline, and a flexible roadmap to get from where the company is today, to where it needs to be when the owner wants to exit.

And what happens after you sell? The business that is the result of your life’s work is part of an ecosystem today. It benefits customers, suppliers, employees, the community and the environment. You know everyone by name. You curated the products and services to delight the customers that you know so well. A lot of your employees have been with you since they finished school, and they depend on you for their living. The community knows they can come to you with issues and you’ll respect how your decisions affect them. Your manufacturing is done locally, and doesn’t harm the environment.

You could probably make more money in your business. If a purchaser has a 5-year exit strategy and wants to earn 20% over what they paid you, they could probably do that. These purchasers probably don’t live in the community, so that 20% is getting invested somewhere else, and the pain is far from their eyes and experience. Employees often go first. They could cut back on staff costs by converting full-time positions to part-time with no benefits. Retire long-term employees and replace them with entry-level folks. They could consider cutting quality or raising prices and selling to a more price-conscious customer. There are always suppliers out there willing to operate at a discount hoping that volume will allow them to make a reasonable living. And we could always send manufacturing overseas where labour and environmental laws allow the same quality for a lower short-term cost. How will it feel to sell to someone else? This isn’t just made up. This happens all the time because this exit strategy works really well for the purchaser. Employees, customers, suppliers, and communities? Maybe not so much.

There are alternatives. When you truly know how much is enough, it’s much easier to plan. The first step is to be very clear on how much money you want and need when you retire. And don’t aim low! Sit with a financial planner and dream all your dreams. Come away with a clear definition of “Enough”. Because once you understand how much you need, how much you want, and how much you’d like to leave to family or various charities, you may be surprised at the amount required. And now is the time to deal with surprises while you can still change the outcome. Surprises a few years out from retirement are much harder to deal with.

Create a plan to get from where you are today, to Enough. Get help if you need it. You’re an expert at running your business, not at financially engineering an exit strategy that supports your lifestyle after retirement. Few people are!

Talk to your family and your employees. If you want to sell, perhaps your employees would like to buy in to the company that they’ve helped to build. The community may want to invest, particularly local banks who are charged with ensuring that regional investment remains strong. And you may want to consider keeping some of your retirement funds in the form of preferred shares in the company that you built, with a dividend rate that helps support your financial needs but leaves enough in the company that it can continue to thrive. And some companies are allowing the public to “invest” with creative solutions that keep their money safe while providing a return in the form of discounted goods or services. The company of the future is a responsible member of the broader community, so its loss will be felt by many.

These companies have been nurtured by owners and become their life’s work. They benefit all who interact with them. If you want nothing more than to sell and never think about business again, that is completely understandable! Increasingly though, people work longer than they did in the past. There are flexible work arrangements to allow a slow transition of knowledge and some income even after a new executive team takes the reins. There are advisory board positions and consulting projects that take advantage of a lifetime of valuable skills, while making room in our lives for rest and other interests. If there is any desire to stay connected and allow your investment to continue to grow and nurture the community it’s a part of, then there are options beyond selling to the highest bidder. Your exit strategy can include continuing to nurture and watch your business flourish under new leadership and continue to pay you through your retirement. That’s sustainability at its best and your exit works for everyone!