The value of the shares of your company can be estimated at $ 2 million and be recorded on your balance sheet. However, the reality is that this value remains hypothetical until you find a serious buyer to pay you this amount. As part of a long-term financial planning process, retirement scenarios should also allow you to visualize your situation without this ideal option. This is the risk part of entrepreneurship, and your financial strategies should allow you to enrich yourself throughout your life by avoiding injecting all your cash into the business.
Establish a plan over a few years
If your business is mature or you feel the call of retirement, you may be wondering if it is possible to transform your business, in which you have invested “body and soul”, into a retirement plan? While these calculations are easy to do, however, selling a business should be prepared with a multi-year plan, ideally.
Have you correctly identified your buyer? Will it come from outside or inside the company? In the first case, your personal commitment will be less, but the chances of success of the transaction will probably be lower, unless it is a competitor familiar with your industry. You also need to consider the risks associated with balance-of-sale financing, where the buyer will only pay you a portion of the sale price after a certain period.
It seems natural that transitioning to a member of your current team will decrease your exposure to risk, for the simple reason that your business should be less affected by a sale to a key employee. Also, selling to a family member has additional human factors and tax considerations that should be built into your plan. Insofar as you wish to sell your units to a co-shareholder, it is important to understand your shareholders’ agreement on the one hand, but also to validate the interest for the other to buy them back on the other hand. A sweet mix of strategy and communication is required here. Otherwise, you will benefit from knowing the mechanisms provided for in the agreement in the event of a sale to a third party.
Whether the buyer is clearly identified or not, this type of transaction should be prepared over a period of two to five years, and you will benefit from calling on the many services specializing in business succession.
Tax treatment of the sale
If you are the head of a large company, I have no doubt that you have been accompanied for a long time by a team that has changed your business structure. However, it may be that, if you are the head of an SME, you have focused your time and effort on the heart of your business and its activities. This does not change the fact that your shares may have appreciated in value, but you must then consider that a tax assessment is required to validate certain elements, in particular if they qualify for the deduction for capital gains and sometimes to justify the value of the transaction to the tax authorities. Or if the transaction is carried out at a justified market value by selling to a related person. For example, you could own real estate or investments not actively used in the operation of your business that would disqualify your shares.
By preparing the sale several years in advance, you will have time to “purify your operating company”, to use the dialect of my tax partners. Some sales transactions sometimes require a reorganization, discussing the possibility of completing the sale of a clientele or goodwill, which represent assets, rather than selling the shares, for example. By surrounding yourself with a competent team, both in financial planning and in taxation, you will be able to optimize your project fiscally by visualizing the different effects of all your options on your financial planning.
The value of your shares
A business is often like our baby. The entrepreneur gives life and does not count his hours. So, when the time comes to define the market value of their “precious” property, some owners sometimes without realizing it give an unrealistic price. In the event of a sale to a co-shareholder, you should refer to your agreement, in which the method of valuation of the shares is included. Unfortunately, in many cases the convention contains an appendix which has not been updated for a long time. Finally, in some catastrophic cases, the convention will state that the value will be the adjusted book value. The stakes are high since the book value – the value on your balance sheet – may not be as great as what you think you can get in the market.
Stock valuation is carried out using different methods depending on your type of business. There is no single, magic formula. In the end, the sale price will end according to the value agreed between you and the buyer. The use of an external evaluation will allow you to adapt your negotiation strategies and, also, your retirement scenarios.
Financing your retirement
Once the value of the shares is established, one question remains in mind: “Will I have enough money?” Obviously, the answer will depend on your personal and marital situation as a whole, but also on your retirement goals (how much do you need per year to live), your investor profile, your age, and so on. In the majority of cases the answer is yes, but in the event that it is no, you will be even happier that you have thought about selling your business before you are “ready”.