Retirement? Next Exit

“Alan, I love what I do but I am 60 and I need to be thinking about retirement. What are my options?”

Translation: “It’s not fun anymore or you have started dreaming about beaches and travel or simply more leisure.” In a few cases owners are fed up with the responsibilities and liabilities of ownership but aren’t ready to stop working. Whatever your circumstances, for most, this is the single biggest financial decision of their careers. You owe it to yourself to think it through. Here are some insights and challenges to help you do that.

The Emotional Side

The decision to sell your business, no matter how pragmatic your personality, has emotional elements. As such, it is an ongoing story of success and failure, victories and defeats, personalities and relationships. You would do well to be prepared for that. Most funeral directors feel an obligation to loyal staff and local residents to make sure their successor is a good fit. Fit is an important factor. What kind of organization or individual do you want to take over your legacy? I can almost guarantee that you will experience some discomfiture no matter who buys your firm. The key is to do your best to find thinking. That’s why I encourage clients in the final stages of considering multiple offers to visit the acquirer’s operations and ask good questions. Price is not always the final consideration.

Stop With the Euphemisms

During the 1990’s the Loewen Group introduced a strategic term that became a euphemism for selling your business...Succession Planning. This enabled potential sellers to overcome the psychological resistance to “selling” their business. Semantics works that way. 

“Succession Planning” normally refers to transferring the business to children or staff. Selling to insiders is a choice that brings with it both rewards and consequences. Rewards in that you have a better chance of continuing your legacy as you envision it and you can often engineer the deal structure in ways that are advantageous from a tax perspective. Consequences in that insider transactions almost always involve some level of seller financing which means you continue to carry risk.

The advantage in selling to a third party is that seller financing can often (not always) be avoided. The disadvantage is that your influence will rapidly decline in the first 24 months. Even if you continue to be employed, the buyer will begin to implement their own systems and processes. This is both proper and unavoidable... it’s their business now. Yet, you are likely to feel conflicted as you feel obligated to support your successor but don’t completely agree with their actions. I have had several clients who felt it necessary to move to different communities to avoid this. Frankly, I often think they are overreacting but then, I tend to look at things more pragmatically than some.

Seller Discretionary Earnings:

A topic almost never discussed in funeral service is the concept of “Seller Discretionary Earnings.” Seller discretionary earnings (SDE) refers to the actual economic value of income and perks that come with ownership. Small business owners almost always forget about this until about 10 days after the Letter of Intent is signed when they call me to say they can’t sleep because they are not sure they can replace what they “really” earn from their business. Fortunately for my clients, I have already thought about that. There are two things to remember:

1.  It is mathematically impossible for you to sell your business, pay off all debt and taxes and have enough left over to invest at a rate that will replace your SDE.
2. It is very possible, with proper planning and timing, to retire comfortabl

Some tips and challenges:

As I help people and their families work through the issues, I find there are some common ones. Here are 8 as well as a coaching tip:

1. Do you want to sell, or do you just want relief: Human stress usually leads to a “fight or flight” response. Consequently, people in stress will obsess about getting out of their circumstances and ignore what they might be getting into. Reflect on your motive for selling. What if someone could help you relieve the stress in ways that you would enjoy work again AND retain that SDE? I have been able to do this on several occasions simply by empowering the owner to reimagine how his company is structured.

2. What challenges do you see coming in the next 5 years? Are you or someone else capable of responding effectively to them? If not then maybe your firm is worth as much today as it ever will be. It is time to get yourself and your family to safe harbor. 

3. Are there things you need to do to get the company ready for sale? I face this with clients frequently. Too often the long-term debt is large enough to suck up too much of the sale proceeds to provide a viable retirement. So, we institute a plan to pay down debt more rapidly.

4. Are you ready for a sale? Here again is a critical question. Perhaps your business is too small and you are too young for you to be able to realize an after-tax amount that will sustain your retirement. It may be that you need to retain the business longer in order to maintain your lifestyle. Or you may need to find a new career while your nest egg reaches that hoped for tipping point.

5. Is there a market for your business? Smaller rural funeral homes in particular face the prospect of not being able to find a buyer. Rural markets are vulnerable to significant losses when purchased by an outsider. How can you structure your business to make it more attractive and less risky to potential buyers?

6. Would you be willing to stay on? I wonder if the continuation of this sentence should be…and not be a nuisance. When you sell the business, no matter how good you think you are, IT IS NO LONGER YOUR BUSINESS. If you intend to stay in the community you owe it to your customers AND staff to choose a successor you will never have to apologize for.

7. Are there any potential dealbreakers? What is your minimum after-tax yield from the sale? Are there any lines you are not willing to cross like safeguarding the employment of your loyal key man?

8. Is your tax structure the best for you in a sale? If you are a “C” Corporation filing on form 1120, do not let the sun set before you make an appointment with your accountant to discuss whether you should elect Subchapter “S” status. Ask your accountant to prepare a “tax impact analysis” so you know what a potential sale will yield AFTER you pay Uncle Sam.

Keep Calm and Carry On

There are a few companies that still employ a tactic common in the Middle East where it is the custom to begin negotiating AT the closing.

Between the time you sign the Letter of Intent and the closing you will make a lot of compromises. Among these is making the transaction public.

At the same time, you will begin to anticipate a happier life. You are making an emotional commitment to the sale. This is what makes this tactic effective. Most people are so committed by closing that they will agree to even major concessions.

They won’t like it but, feeling trapped, they will agree. The antidote for this is to be prepared to leave. Close your briefcase and go home. You will be shocked at how quickly the buyer drops the issues and agrees to the original terms. Being prepared to walk is almost always effective...but not always. I tell my clients they need to be prepared only if they really will walk.

In any event, good luck. You have likely worked hard to be in this position and you deserve the best.

Alan Creedy is a Certified Exit Planner (CExP). Formerly a CPA, he has spent more than 40 years helping funeral home owners strengthen their companies, anticipate and respond to changing customers and plan for a better future. He now focuses his time on helping owners plan and execute the transfer of their firm. Some 70% of these transfers are considered “Insider” transfers to children or key employees. For more information go to: www.funeralhomeconsulting.org