Selling a business at retirement

[Empty Pockets]

Hello all, I'm new here so if this topic has been discussed before I apologize. This is my first "real" post.

I'm guessing there are others on this forum that have owned their own small business and used it as a major source of retirement income. I have given my lifeblood to this business for the last 22 years. I started here when I was 19 years old and I made myself a promise that if I worked here 30 years I'd be able to retire. I'm still on track and have 8 years to go.

Here's my question. How have you structured the sale of your business when you retire ? Cash up front or a seller financed structured sale, contract for deed ? My business would be worth about $375,000, possibly more. I have a cost basis of $155,000, so there would be some capitol gains tax to deal with.

Ideally in a perfect world I would like to structure the sale of my business over a 10 year period at an interest rate of say, 7%. This would provide me with an annual income of around $53,000. I have no debt and I can live on that while my other investments grow for another 10 years. This is similar to how I purchased the business and it worked great for me and the previous owner.

The problem with this method is the business risk. I'd be betting on the success of the new owner. The price & terms are reasonable, and an ambituous new owner could easily handle it. The wrong owner could run it into the ground in a couple of years and leave me holding a note on a worthless business.

A cash sale would probably reduce the field of potential buyers, and it would mean facing the capitol gains tax upfront. But, it would add some peace of mind. One of the reasons I want to retire is so I don't have to worry about this business anymore. If I had the cash, I could quit worrying about it.

Does anyone have any experience, advice, suggestions, horror stories, success stories or any other words of wisdom ? Thanks for your help.

[REWahoo]

EP, there was a discussion about selling a business here:

http://early-retirement.org/forums/i...p?topic=6130.0

Hope it helps.

[Martha]

If you sell your business on an installment basis you want to make sure that you can repossess the business assets if you are not paid. I have seen several situations where the buyer did not succeed at the business and the seller ended up taking it back. You want to be able to get back in quickly and easily. Most often I think that it is better to take cash up front and bite the bullet on the taxes. But every situation is different.

Recently I saw a situation where a person bought a family business from an uncle. Paid way to much for it and the nephew was working the business for no pay at all. We pounded on the uncle and said that he could take less voluntarily or the business would end up in bankruptcy and he would take less involuntarily.

[Tracy42]

We have a similar situation with DH's law practice we will face in the next 5-7 years. We are considering bringing on another attorney who has potential first as an employee, then, if it's the right fit for us and the business, as a partner who will then buy us out over a period of years. Up side is you get more time to make sure you picked the right buyer before handing over your business. Downside is you reduce your cashflow for a year or so before you ultimately sell. Good luck!

[Empty Pockets]

Thanks for the pointers. I've thought about bringing in a younger person as an employee and then sell them the business if they're interested. I've seen this backfire on more than one employer and it scares me. If you get an underperformer it's hard to get rid of them in time to get another replacement. If you get an overachiever they may decide to go out on their own (even with a non-compete agreement).

Financially, an installment sale of 7 to 10 years would be in my best interest.

Emotionally, a cash sale (bank financed) would be best. Once I'm gone I don't want any possibility of having to come back in, and unless I'm willing to come in and repossess the place I probably shouldn't be financing it.

It's 8 years away but I'm starting to make plans now. I've got feelers out to potential buyers, I've already talked to banks to help finance the purchaser and I'm going to get a formal appraisal in 3 years to see where I need to make some changes to enhance the business while there is still time. Kind of like staging a house before you sell it.

[Craig]

EP, cash is king, so while unlikely, if you had two comparable offers, one deferred and one cash, I'd take the cash and damn the tax consequences. Seen too many notes unpaid. 'Course, depends a great deal on the buyer.

Is there any real estate involved? If so, you can split that from the sale of the business itself, and hedge a little there. The rent can also create a quasi annuity ...

If you give us a little more info, perhaps you'll generate a few more helpful ideas. Service, manufacturing, retail, ... ? How many employees? Fixed assets? ...

You're very smart to think about this now. Your best time to sell of course is when the bottom line is maximized ... it's all about selling a stream of cash flow, at the highest multiple possible. Having solid financial statements will help ... at least a compilation each year, perhaps a review, or an audit if you can afford it.

Best of luck, and congrat's on building a successful business.