Boomers are hotter than Georgia asphalt these days. The industry has awakened to the fact that these quirky 42-to-60-year olds are going to be everyone’s retirement-aged clients in just a few short years — their parents’ generation either gone or ensconced in assisted living centers making very few decisions without the help of their boomer children.
Of course, the common characterization of boomers is that they’re spendthrift so-and-so’s, unprepared for retirement, destined to crash and burn. Less publicized is the fact that many have accumulated significant equity in homes and businesses and, along with inheritances from parents dying mercifully un-prolonged deaths, will actually be just fine… that is, if they have the right guidance when it’s time to sell their businesses.
We asked experienced advisors the most important considerations and strategies to weigh when advising boomer business-folk on converting businesses into income streams. Four themes came up over and over again: valuation, teams, taxes and the softer side — what they will do when they’re no longer down on the farm.
Says David Lewis, president of Resource Advisory Services in Knoxville, Tenn.: “The trick will be to optimize business valuations.” In many industries, rules of thumb develop that don’t match reality and don’t provide reliable guidance to sellers. “In our own industry,” says Lewis, “we’ve seen the ‘two-times-revenue’ rule of thumb and locked in on that without questioning it through rigorous business appraisals. And, in my experience with clients selling businesses over the years, I virtually always see vast differences between the values they place on the businesses at the beginning and the values they receive when they actually sell.”
One of the best things we can do, says Lewis, is find ways to help boomers get a realistic understanding of the true values of their businesses. Adds Michael Potito of Singer Potito Associates in Amherst, Mass., many businesses, especially professional businesses, don’t have a “natural income stream.” They may have a client list that’s worth something, but if the business owner must initiate the sale of services to the client, the list may not be all that valuable. “The doctor with his own medical practice doesn’t call up his patients and say, ‘Hey, are you sick yet because we’re offering a good deal today.’ Businesses with an income stream that transcends the originators will have a lot of value.”
Look for a professional to assist in the valuation process — someone with an AVA designation. “This stands for Accredited Valuation Analyst, which is a specialty in valuing small businesses,” says Potito, who himself carries the designation. Of course, a CPA with a Certified Valuation Analyst designation is also a good choice.
In addition to a valuation specialist, your team (assuming you don’t possess some or all of this training yourself) should include a CPA, business attorney, and possibly an actuary, says David Morganstern of CMC Advisers, LLC in Portland, Ore.
“The CPA is a critical advisor for apportioning the sale price to either assets or stock for capital gains purposes. The business attorney is instrumental in negotiating the business transfer and reviewing the contract between the buyer and seller. And we have consulted with an actuary when the sale would impact a defined benefit plan already in force wherein the business owner would have a liability to employees.”