Retirement is around the corner for many baby boomers, and a number of small-business owners of this generation are finding it’s time for a major move: selling.
Terry and Patricia Palermo have started preparing for exactly that over the last year. They’ve owned Triton Products, a small manufacturing firm in Ohio, since 2003. Now that they’re in their 60s, the couple has started drafting plans for a possible exit, which Terry envisions happening in the next two or more years.
It has nothing to do with the state of their 11-person company, which makes storage products and is doing quite well, he says, especially after surviving the 2008 financial meltdown.
“It’s not like anything is on fire,” Terry Palermo tells NerdWallet. But, he adds, “neither of us wants to work until we’re 75.”
Boomers are a vibrant entrepreneurial generation. In 2009, a Ewing Marion Kauffman Foundation report said that from 1996 to 2007, Americans in the 55-to-64 age group had a higher rate of entrepreneurial activity than those ages 20 to 34.
But they aren’t getting any younger.
“The youngest of the baby boomers are about to hit 50 years old,” Chris Wagner, a director at Strategic Wealth Partners, tells NerdWallet.
Many small-business owners of this generation, he notes, endured the trauma of the 2008 crash. Some of them were likely thinking of selling about eight years ago and were “close to pulling the trigger,” he says, but then the crisis hit.
“Their businesses may have failed and they had to work for someone else,” Wagner says. “Or they got their business through tough times.”
That’s what the Palermos were able to do. In January 2009, Palermo says, “it was like someone turned off the faucet. It was like the planet went cold.”
But the couple worked hard to survive the downturn, eventually rebuilding their small business as the economy improved.
“A few years back, selling a small business was tough,” he says. “Today, it’s pretty good out there.”
Sales of small businesses (annual revenue of less than $500,000) and medium-size businesses ($500,000 to $2 million), rose year over year in the fourth quarter of 2014, according to the most recent “Market Pulse” report from Pepperdine University’s Graziadio School of Business and Management.
Craig Everett, director of Pepperdine’s Private Capital Markets Project, said in a statement that period showed a strong buyer’s market. But, he said, “the number of buyers may be catching up. Once you get past the smallest market sector, buyer advantage is definitely leveling off or actually switching to a seller’s market.”
Why are small-business owners selling? Retirement was the No. 1 reason, followed by “burnout” and “new opportunity,” the report said.
Wagner says he’s been talking with more people in their 50s and 60s looking to sell their businesses.
And these are important conversations to have sooner than later, says Bob Phillips, managing principal at Spectrum Management Group.
“It really takes a good five years to position a business to be sold with maximized value,” he tells NerdWallet.
That includes making sure the company’s financials are in order and there’s a clear growth strategy to make the business attractive to would-be buyers. So planning ahead is important if you want to avoid serious blunders.
Here are three of those blunders and how to avoid them:
Overestimating the value of your small business
It’s a good time to sell, but many small-business owners think their companies are worth more than they are, says Spectrum Management’s Phillips.
“People tend to latch on to easy rules of thumb” heard from peers or at business conferences, he says, but those views are flawed.
One is the belief that a small business is typically worth a multiple of its revenue. That’s not necessarily so, Phillips says, noting that of two small businesses with the same revenue, the one operated more efficiently and with a healthier bottom line would be more valuable.
In estimating their profit, some small-business owners also fail to take into account the amount of work they do for the company, which may not always be accurately reflected in expenses. Someone who buys the small business might have to hire someone to do that work, Phillips says. “That impacts the bottom line.”
Terry Palermo says he understands the tendency of small-business owners like himself to overvalue their companies because “we’re emotionally tied to it.”
But he also says he understands that to get the best value in a sale, his small business must be in good shape. “The day I step off the ship and someone else steps in,” he says, “it’s still going to sail.”
“You have to show sustainability,” he adds. Potential buyers “want to know it is safe.”
Not thinking about what comes next
“Think about what you plan to do next,” Wagner says.
Sounds like no-brainer, but this can be the tricky part for boomers who don’t have a clear idea what they plan to do after selling their small business, “whether that next step is to retire or start another business or do something they’ve never tried before.”
Palermo says selling his small business would definitely be a retirement play. But he has some idea what would keep him busy in retirement, which includes being more involved in his church and civic organizations like the Rotary Club.
He also knows that planning for that future means crunching numbers for the lifestyle he and his wife plan to have after selling their small business.
Underestimating the emotional effects of walking away
Selling your small business isn’t just about numbers and valuations.
“There’s an emotional side to it,” Wagner says. “Are you ready to let go? Maybe at first blush it sounds great to exit. But when they start thinking about it, they think, ‘Gee, if I didn’t have this business to run everyday, what would I be doing?’ ”
Phillips says he’s worked with clients who have explored a possible sale but “when they got down to the end, they just couldn’t cut the cord.”
Understandable, he says. “It could be frightening. It’s too much of an unknown.”
But you have to face up to it: There will come a time when you can’t operate the business anymore. You have to answer this question, he says: “If not now, when?”
Palermo himself has been thinking of alternatives to a total exit.
“If you still have the passion to stay in the business, then you should hold onto it and maybe have someone else run to it for you,” he says. For some, “the ideal endgame would be to sell it and still be a consultant for this business or to work part time to help them with strategic things.”
Or you could make a clean break. For himself, Palermo says, “I could go and do more philanthropic things — which would be fine.”
Benjamin Pimentel is a staff writer at NerdWallet, a personal finance website. Email: firstname.lastname@example.org. Twitter: @benpimentel
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