What does being prepared mean for 2023 for a business owner who is approaching, at, or already beyond normal retirement age? It has become fashionable to talk about the inevitable recession this year. Inflationary stimulus and loose money supply throughout 2020 and 2021 combined with ill-advised lockdowns and geopolitical disruption, have created a slow motion car wreck for the global economy. All three of these issues still exist to some degree as we enter 2023.
Just as the result of these failures in leadership are eminently predictable, the impact on small businesses thinking about transition is equally clear. Company valuations will likely decline. Inflated multiples fueled by low interest rates have started to disappear. If you planning your retirement based on the values of 2021 and 2022, it may be time to reassess.
As inflation remains elevated for an extended period to come, running a business could get tougher for that period of time. The “Great Resignation” was only half driven by increased worker mobility. The other half is being driven by Baby Boomer retirements. This half of the trend should increase. As employees seek a counterbalance to inflation, staffing will be an even bigger issue than sales volume.
Many owners will look back at 2022 as the year they finally decided enough is enough. In just over 20 years owners have overcome the dot.com crash, 9/11, the Great Recession and now a combination of resurgent inflation, supply chain headaches and a lack of available qualified workers. These are tipping the scales toward developing an exit strategy right now.
Lower valuations call for creativity in structuring transactions. Can you consider an employee buyout to maximize the benefits of sustainable cash flow to provide owners with income that might not be available in a 3rd party sale? Seller financing or an installment sale may offer flexibility that brings more qualified buyers to the table. This may stretch the income over a longer time period but could result in a larger payout.
Retaining top talent will be more important than ever, especially in a rising wage environment. Structured equity sales can act as both a incentive and golden handcuffs to ensure that a company’s best employees and the enterprise value, remain intact through a recession.
Many owners have been lulled into false sense of security by a robust business broker and private equity marketplace. They have continually postponed their personal financial planning and exit planning in the belief that a transition could always happen whenever they felt the urge. That was never really the case, but now it has become critical that they proactively plan for every contingency. Companies will be sold this year, but valuation will likely be lower. If this is the year for you to begin your “second act”, it’s still the same approach as it was before. Being proactive and prepared for 2023 is a matter of higher a professional planner, planning the process and researching the market. Act Now!
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which strategies or investments may be suitable for you, consult the appropriate qualified professional prior to making a decision.
FPA Owner Transitions 