Small business exit strategy

[Del Q]

Hi all, it's good to see a site of like minded people, sometimes I feel alone in my goals. My main goal has always been to be FI, not so much ER, just work on my terms. I started young, I was offered a job at a small business while still in High School with an opportunity to buy into it in 5 years, I ended up buying it out in 4 years at age 22. When people ask where I went to college I tell them I got drafted out of High School. While doing the planning at the time I had a goal of owning & operating the business til age 50, then finding a less taxing job. Well, in 6 months I turn 50 and I have an exit strategy in place. It's been my experience that most business owners stay too long. It's also not good to stick around after the sale.

Here's a current summary.

$645,000 SEP IRA (60/40 stock/bonds)
$235,000 ROTH IRA's (100% stock)
$1,000,000 INVESTMENT ACCOUNT (90/10 stock/bonds)
$70,000 CASH/SAVINGS
$50,000 HSA
$550,000 BUSINESS EQUITY

We own our home and have no debt at all, personal or business. We'll have another year of adding about $100,000 to the totals above, plus growth.

We have two in college, but thanks to starting 529's at birth, education expenses are covered. They're both hard workers too.

Two years ago I hired a young man to work for me that wants to buy the business. It's going well and I'm prepared to sell in January 2016. The sale will be a 11 year contract which will generate about $60,000 a year for me. My wife and I can live on this comfortably for 10 years, plus we'll both have part time work for at least 5 years. I've been buying my own health insurance since I was a teenager so I know what to expect there, income taxes will be minimal.

At the end of the 11 year contract I'll be 62, DW 67. We'll both file SS, me at a discount but the wife will receive 50% of my FWR so we expect around $3,000 month. I'll have paid in over 35 years, 28 of them at the max.
In the mean time all the investments above will be left to grow untouched, The SEP should be about $1,500,000 at this time which will provide about $60,000 on top of the SS, if we need more we'll tap into part of the other investments.

We live a modest lifestyle in a small town, we don't anticipate our life style to change much at all. Our entertainment consists of hunting, fishing, canoeing, camping and gardening. We're products of depression raised parents and are happy to live a simple, somewhat private lifestyle.

I don't know if I can contribute much on this forum, but I'd appreciate being able to ask a question from time to time.

Thanks

 

[pb4uski]

Welcome and well done! A viable exit strategy is one of the most challenging things for small business owners and you seem to have a good plan in place. A neighbor recently sold his used car dealership to two of his long-time employees but still owns the real estate and finances the inventory and is involved. I have two friends who each own a small businesses and neither know what their exit strategies will be. Another acquaintance just simply closed his small business and liquidated the equipment and whatever little inventory was left.

 

[Senator]

Great Job!

I assume you have had a business lawyer draft the documents...

You want to be sure that the person has assets to collect in case of a default, you do not want the business back. He might have gone out of business, and you have nothing. Of course, if he files bankruptcy, you also have nothing.

Also, you may want to maintain a significant stake in the business, so you can monitor the results. Perhaps as a CEO/Director You do not want to turn over your 'baby', only to see it die along with your $60K a year.

Check the person's credit and NW statements. That will give you a good indication of what you have in store for you. It would be better to have the guy get a business loan, and you cash out.

 

[robertf57]

Congratulations on your accomplishments and your exit strategy. This is an area where many fail to plan. If the cash flow of the business is as I deduce from you description, why don't you have your employee provide at least a substantial down payment with a loan on the business? You are taking a bit of a risk that the business and your buyer will perform well a decade into the future..... Also, I would rethink the social security plan... Unless you expect to die early, I would delay taking social security until at least FRA (actually I am going to 70). Spend some of your accumulated assets to get a guaranteed 8% return on an inflation adjusted annuity.......

 

[Del Q]

Thank you for the quick replies, I appreciate it and respect your advice.


I've been working with an industry consultant who I have hired to put together an appraisal and opinion. He advised the seller financing method, this is the most common in our particular industry since so much of the value of the business is based on intangible assets (future earnings). He told me it's been his experience that it's best to have the seller finance it 100% and have strict performance standards in place and get detailed financials on a monthly basis. If any red lights come on the sale contract would have a "hammer clause". He said that the lenders who would be interested in financing it would only finance a percentage of it and I'd be holding some of the debt, but they'd be first in line in the event of a foreclosure and I'd likely not see anything. Believe me, I'd sure prefer a cash sale, but in our industry there would be at a substantial discount plus the tax bite in one year. The interest rate he suggested was 2% over the 10 year treasury note, which would be about 4.5%, better than any immediate annuity could offer. I realize there is business risk involved with this sale, but it's my best option. I also think it is a very good option for my clients, if I sold to a competitor they would use this as a satellite office and staff it with a manager. In a small town people would rather deal with the owner and they like the man I've got in here now.


Social Security is a wildcard for folks my age, a lot can happen in the time between now and our eligibility dates (political and personal health). I appreciate the advice on waiting, I'll look into it much more closely when my eligibility date gets closer and weigh out best option.


Thanks for the advice.

 

[imoldernu]

Great Job!

I assume you have had a business lawyer draft the documents...

You want to be sure that the person has assets to collect in case of a default, you do not want the business back. He might have gone out of business, and you have nothing. Of course, if he files bankruptcy, you also have nothing.

Also, you may want to maintain a significant stake in the business, so you can monitor the results. Perhaps as a CEO/Director You do not want to turn over your 'baby', only to see it die along with your $60K a year.

Check the person's credit and NW statements. That will give you a good indication of what you have in store for you. It would be better to have the guy get a business loan, and you cash out.

+1

11 years is a long time. An hour or so on the SBA site may help in looking at the business plan to see it will support the financial stability that you'll need to receive your expected payments.

https://www.sba.gov/writing-business-plan

and this advice on exiting your business:

https://www.sba.gov/content/plan-your-exit

and this from the IRS... where I had a few minor problems on exit:
http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Closing-a-Business



Best of luck... been there, done that... on a smaller scale.

 

[daylatedollarshort]

We live a modest lifestyle in a small town, we don't anticipate our life style to change much at all. Our entertainment consists of hunting, fishing, canoeing, camping and gardening. We're products of depression raised parents and are happy to live a simple, somewhat private lifestyle.

I don't know if I can contribute much on this forum, but I'd appreciate being able to ask a question from time to time.

Thanks

I don't have anything to offer on the business sale, but overall your LBYMs lifestyle sounds quite smart and secure. Welcome!