You are finally at the point in life where you are considering retirement. With all the work you have put into your business, retirement is a welcome sign. You are done, and you want to step away and cash out on your investment: you are ready to sell.
But is selling your business and retiring the right move? What if there was a way you could still own the business, not work in the business, and make more money than if you sold it?
Selling and Retirement: They Are Actually Two Different Things
Many business owners think the only way to properly retire and not keep working in their business is to sell and wipe their hands clean. If they were to hang onto their business, they believe they’d be working in it until their grave (which for many is less than ideal).
However, this doesn’t have to be the case. In fact, this solution generally brings in LESS money than if they were to keep the business. But how can you retire and still own your business?
Pete and His Story: Selling His Business and Retiring Wouldn’t Have Been Enough
Pete was the owner of an asphalt paving company that specialized in parking lots and residential driveways. Over the years, he’d grown “Pete’s Paving” from a one-man operation to four, three-person crews. In a 30-mile radius of Baltimore, his company was known for quality work at a fair price.
On the eve of turning 60, Pete was starting to think about his next chapter in life, so he wanted to talk to us about signing up for a free valuation with a large “mergers and acquisitions advisory firm.”
“I’m curious about the value of my business,” Pete said. “If I could get $3 million for it, I’d take it and run.”
“How did you come up with that number?” was our first question. “Well,” Peter responded, “if you invest that for me and get a return of 5%, Martha and I can live on $150,000.”
“Before we talk return,” we responded, “have you thought about the taxes on a $3 million pay day? At current tax rates, you’ll pay up to 37% to the IRS and over 5% to the State of Maryland. In a rough estimate, that takes about $1,260,000 off the top. Then the broker will take its cut, there will be legal and accounting fees . . . “.
“Stop!” Pete interrupted. “I didn’t work this hard to walk away with less than $2 million. Maybe the company is worth $4 million or $5 million?”
“Maybe it is. We don’t know. We also haven’t figured out whether you and Martha can go from your current income of $500,000 to $150,000 per year and live the way you want to for the rest of your lives. But let’s take a step back. Let’s ask whether it makes sense for you to sell at all.”
After a long pause, Pete asked, “What are you suggesting? That I run this company until the day I die?”
“Yes and no,” was the best—and we admit, cryptic—response. “What if the best way for you to enjoy a financially secure retirement and do the things you want to do every day is to continue to own the business?”
“You’d have to make an airtight case,” responded Pete, “because that’s what Martha’s going to need when I tell her that instead of retiring, I’m going to keep working.”
“If we set this up right, Pete, you won’t be working every day or even every week. You’ll still be the owner and continue to draw the same income and distributions that you always have.”
“Now you’ve got my attention,” Pete said. “Go ahead. Make your case.”
Ask Yourself: “Financially, Should I Really Sell My Business and Retire?”
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