A few years back I met with prospective client to discuss his objectives for his business. He was in his late sixties, and wanted to retire. Unfortunately, he was the only one who could close business. He had also associated himself with another shareholder who was supposedly brilliant (i.e. the inventive one) but also increasingly erratic in his behaviour with others in the company and with clients. To put a cherry on this particular sundae, the business was also owed a significant amount of money by a major client, with severely hampered cash flow. My prospect told me point blank, “I want to retire, but I’m a prisoner of my own company. I can’t sell it, because it’s worth nothing without me; I have no one to take over from me; and I’m owed a significant amount of money to get at least something out of it if I were to liquidate it.” He figured his best option was to bring in one of his technicians to run the company, someone with little actual business experience, and who was also very young (about 25 years old). I tendered a proposal to help him get out of that mess, but he claimed he didn’t have the money to pay me.

All in all, not a pretty situation. Though it’s admittedly extreme, in my work with small business owners and entrepreneurs, I repeatedly encounter owners who, though not necessarily a prisoner of their business, could be reckoned fairly close to being so. In my mind, there are two basic prosperity models for small business owners. One is to build a machine, a business that can be passed on to one’s children or associates, or otherwise sold at a reasonable profit. The other model is to operate a business for a number of years, drawing a salary and dividends commensurate with one’s overall revenues and personal objectives.

In the first, you realize that you have to create systems and processes and to surround yourself with people who can eventually run the business without you. You can then choose to scale back your activities in the company, or to sell or transfer it. The bottom line though is that you are no longer required to be there on a day-to-day basis to make it work. The most important area of course is in sales. Finding sales talent is not easy, and it’s a challenge to compensate good salespeople in a small business. The most common way to do so is to ensure they have a stake in the business, either through bonuses or an ownership position, although that can sometimes create a whole other raft of issues.

Not all businesses can be successfully turned into a machine, so it’s important to know if your business falls into that category. In many, perhaps most, cases, it doesn’t. That’s why it’s important to be realistic about your prospects for selling or transferring a business that would have to be a going concern without you. Also, many small business owners make the mistake of overestimating the value of their business for selling. Many entrepreneurs think it will be worth two or three times annual revenue, when in actuality they would be lucky to get one year’s revenue for it. In many cases, it’s more like 25% to 50%, and there is often a need for the seller to remain with the business for a number of years in order to maintain client relationships or transfer them to the buyer.

It’s important to be realistic about these matters. In many cases, you’re better off to take a salary and dividends, and build a retirement nestegg outside the business. That way, even if you can’t sell the business for a lot of money, or if you can’t sell it at all, then at least you have built up your retirement fund.

There are numerous advantages to owning a business and being an entrepreneur, but it’s not when you’re 65 and wanting to retire that it is time to start planning for your retirement or extrication from your business.

© 2011 Richard Martin. Reproduction and quotes permitted for non-commercial purposes with full and proper attribution.

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