5 Things Retiring Business Owners Should Consider in the Wake of Covid-19
Covid-19 upended many facets of our society, causing an impact that was felt acutely by business owners preparing to sell or retire. The pandemic put movement on hold for 12-15 months, forcing many to either stall their plans or switch courses entirely. Only recently are people starting to pick up their heads, resume discussions with business brokers, and think about the future. As society starts to normalize, many business owners are wondering what the next move is and how to best get back on track. Here are 5 key things to consider.
1. The Numbers
Covid-19’s impact on businesses is not equal across the board. Some financials are up, while others are down. As such, the first thing to consider is how the pandemic impacted your numbers specifically. Industry and location factor in (more on this below), but your personal numbers will impact your timing. For businesses in the same financial position - or better - than before the pandemic, now may be time to sell. If your numbers are severely down, however, it may be in your best interest to sit on the business for a few additional years until you see a more comprehensive recovery.
2. Your Industry
The pandemic’s impact varies greatly across industries. Service firms and professional services like CPAs are doing well - especially those looking to expand geographically into new markets. Interestingly, veterinarians have benefited from the pandemic and become a target for roll-ups by larger entities. Smaller medical and dental practices are seeing a similar lift. Some service businesses that benefited from the pandemic are actually receiving better offers than anticipated when they attempt to sell.
On the flip side, certain industries continue to struggle. Travel-related businesses such as airlines and hotel chains are not in great shape. They’ve taken an immense hit, and even though numbers are starting to improve, recovery is going to take a while. Adding insult to injury, business owners in these spaces continue to deal with tough, emotional, and exhausting situations in a constantly changing landscape. There has also been a negative impact on related businesses down the supply chain, such as organizations providing the equipment needed for travel (parts for planes, for example). As input prices go up, profit margins are compressed. This means buyers may be more nervous about committing, or more price-sensitive in their offers.
3. Your Location
Similar to industry, geographical location will impact a business’s value and if it’s an appropriate time to sell. In “hot” markets, generally those characterized by popular real estate markets and favorable business environments for tax policies, businesses looking to sell are still receiving attractive offers. This is true even in soft industries and even if the business value went down. A prime example of this is Austin, Texas, which has seen rapid growth and an influx of business. Boise, Idaho, and Phoenix, Arizona are two other locations faring well. In desirable places like these, some offers are coming in at prices comparable to before the pandemic. On the other end, locations such as California are starting to see businesses depart, due to both the local economic environment and tax policy. Declining markets would impact sale prices negatively.
4. Political Policies
Another thing to consider is the current political policies in place, and whether these may be changing. The new Biden administration is looking to alter many of the previous business-friendly tax and estate policies, with the main concern being a rise in the capital gains tax. Right now, it's unknown, but for businesses looking to sell with a large capital gain, a policy change could make a big difference in the decision to sell now versus two years down the road. One such proposed change could increase the capital gains tax for assets held longer than one year from 20% to nearly 40.
5. Lifestyle Changes
Examine what’s actually required monetarily from the sale of your business. While it’s intuitive to want to sell at the highest price possible - and it may feel wrong to take a number lower than you could have gotten pre-pandemic - if you achieve your financial goals it objectively doesn’t matter. The only question you need to ask is if you’re getting what you need for your future (including your financial plan, retirement needs, and family commitments). Anything on top of that is only a bonus. Accepting that it’s OK to not sell for top dollar can be extremely hard, but it’s important to consider the tradeoff. If a sale gives you what you need, it may not be worth sacrificing time by waiting for a more favorable economic environment.
To this point, the pandemic gave people an opportunity to consider what is important and how they want to spend their time. Having enjoyable things (family, travel) taken away led to more people embracing a “carpe diem'' type attitude that will likely persist. One manifestation of this is the reimagination of how people work. Many executives that formerly traveled a great deal - and planned to retire early as a result - have shifted course, staying in the workforce but refusing to return to the previous level of travel. The value of being at home has become more apparent and shifted priorities for many. Another trend is people taking part-time jobs they never anticipated, participating in the gig economy through things like Uber Eats and Instacart. Whether it be for extra income or as a way to enjoy interaction with others after periods of isolation, many find they unexpectedly love the work.
This all means business owners should spend time asking, “what’s next?” for themselves before selling their business. Examine where - and how - you’ll get fulfillment. If your answers help encourage a fast sale when the numbers suggest otherwise, consider alternatives like installing a temporary manager to run the business until the market environment for selling improves.
Making the Decision
When it comes time to decide to sit or sell or assess whether an offer is “enough” to retire, these 5 factors should serve as a guide. A business broker who is plugged into the current environment, which is more spread between positive and negative than normal, is also a beneficial resource to address unique conditions. At Slaughter Associates, we can help you answer these questions and come to the correct decision for your business - and your life. Providing significant value, we’ll run multiple scenarios with different offer structures and provide a bottom-line impact of how various offers would impact your personal financial plans. For example, the timing of cash flows and the tax impact will affect one client very differently than another.
When making a decision, it’s also a good idea to consider financial programs. The PPP was hugely helpful during Covid; it allowed many businesses to retain their workforces through the pandemic’s toughest times, and keep the skilled people that are now essential to recovery in place. This isn’t the only program, and there may be money allocated through current acts in congress and specific communities. Look out for available industry funds that might benefit the niche you are in.
An Optimistic Future
Despite the obstacles in place, on the whole, people seem optimistic about the future of business. This is especially true in popular geographic locations where there is high demand for real estate -- and for the businesses people are running. Some are feeling pretty burned out, but for most a positive path forward is beginning to emerge. While investments initially took a big hit, there is now a good bull run in the market which is further bolstering confidence. Business and investments are beginning to go well, and new opportunities are appearing. You may need to adjust your expectations from pre-pandemic times, but there is a way forward for business owners looking to retire or sell. If you’re trying to determine whether now is the right time to move forward with the next season of your life, we are here to help.