by Susan Hileman, NWIRC Strategic Business Advisor

It’s another new year and you’ve finally decided to retire. Bravo! Statistically, if you’re like 70% to 80% of other business owners, your business is your retirement fund. And while you have a general idea of what the business is worth, you’ve likely never had an actual business valuation. Whether you seek out experts to help plan an exit strategy, or simply choose to “do it yourself”, here are 6 important financial considerations:

1) INCOME. Determine what you and your spouse need to live on in retirement. Sit down and have a heart-to-heart discussion with your spouse, your wealth manager and/or your stockbroker about a realistic monthly income. Figure out if there’s a gap between how much you have and how much you’ll need. This alone might determine if you’re able to leave the business on your own terms or not.

2) CASH FLOW. Determine what amount of cash flow—after purchase and taxes –the business needs in order to continue to successfully operate. Recognize the next generation may not have the credit worthiness to purchase the business outright. If this is the case, can you afford to back the purchase? (see Item 1 above and Item 3 below)

3) DEBT. Evaluate both your personal debt and the amount of debt the business is carrying. Determine how this debt-load will be settled, shared, or integrated into the business sale.

4) VALUATION. Many owners over-valuate their business, so it’s important to conduct a business valuation to determine how much the business is really worth. The NWIRC’s Family Business Advisor uses the CoreValue management valuation tool, but there are others, in order to provide a benchmark.

5) FINANCIAL STATEMENTS. Have your CPA prepare audited financial statements, especially if not already in place. Your CPA was doing their job when they sought ways to legally minimize your tax liability, however these same accounting principles may also minimize the value of your business. Ask your CPA to provide a complete balance sheet (with detailed information on A/R and A/P, inventory, real estate, machinery & equipment, liabilities and schedules of notes payable and mortgages payable) and an income statement. While your tax return won’t give you the whole picture, this will be a critical place to begin.

6) GOODWILL. Keep in mind, there are other intangibles typically not listed that will add value. This includes your relationship with bankers and suppliers; your customer list; trademarks, trade secrets or intellectual property; your relationship with key employees; your reputation or standing in the industry; and/or other goodwill. These are valued assets—do you know their worth?

Gathering these documents and information takes time—that’s where a Family Business Advisor can help. However, the most important financial consideration for retirement is growing your business while you’re still in it. The number one financial consideration and return-on-investment for any business owner—regardless of industry sector—is increasing the value of your company by selling to new markets or new customers and developing or selling new products or services. This is what will provide a strong cash flow for the business and the next generation owner, and will ensure you are able to exit the business on your own terms.

Susan Hileman is a Strategic Business Advisor at NWIRC. She is a Galliard trained Family Business Advisor, an Innovation Engineering Green Belt, and has degrees in Business Management and Speech Communications from Clarion University.