I own a business that’s done really well. If I plan to retire in 15 years, I’ll need to sell my business for a decent price. How much will I need to get for it to make retirement possible?
Here’s a four-step process for answering that question:
- Picture a typical owner
Allow me to make up some facts that are typical of a business owner who has done “really well.” Your situation will vary, but this illustration should give you the big idea.
Let’s say you’re 50, and your business produces about $1,000,000 a year in taxable income. Well done!
If you’re like most of the business owners I’ve met, you’ve had a lot of years when you earned less than that. Also, you likely put most of your profits back into the business.
If so, you may not have much saved outside your business. But just to be nice, let’s assume you’ve been maxing out your personal contributions to a company 401(k) plan. That likely means you’ve got at least six figures in it.
As for your lifestyle, I’m going to guess you’ve never taken a vow of poverty. You probably enjoy at least a portion of that $1,000,000 you make each year. For illustration’s sake, let’s just say you have a $300,000-a-year lifestyle.
- Travel to 2041
Now, to plan accurately, we need to go to the finish line. That requires that we travel 15 years into the future – to 2041. What will it cost to have a $300,000 lifestyle then?
Note: We’re going to avoid any suggestion that you’ll spend less in the future. I’ve dealt with hundreds of people who have retired. I can’t think of a single one who wanted to have less money to spend. Some do, in fact, spend less. But nobody wants to be forced to do that. We want spending less to be a personal choice, not an economic necessity.
If the cost of living rises an average of 3% a year over the next 15 years, that means you’ll need about $467,000 (in 2041 dollars) to equal today’s $300,000.
I know. “That’s a LOT of money.” Feel free to pause and catch your breath.
- Find the source
Where’s that much money going to come from?
You’ve already identified your business as your main source of income. To retire, you’ll either need to keep the business open (and profitable!) by hiring a competent new CEO. Or you’ll have to sell the business for a good price.
Let’s say you’ve decided to do the latter.
- Do the math
How much will you need to sell your business for in 15 years to generate $467,000 a year in retirement income?
Watch closely. I’m about to do a fourth-grade math problem that will answer this very important question.
But first, let me remind you of a rule of thumb that is alive and well in retirement planning. It’s called “the 4% rule.” It suggests that if you want to pull a lump sum of money out of your retirement assets every year and not run out (very important to most people as they age), you should limit your withdrawals to 4% of the lump sum.
To find the lump sum required to generate your needed income in 15 years ($467,000, remember?), grab a calculator and divide $467,000 by 4%.
The math problem looks like this: $467,000 / .04 = $11,675,000.
Nearly $12 million. That is a really, really big number.
So big, in fact, that we’ll have to solve the rest of this very interesting puzzle next week.
P.S. Fifteen years sounds like plenty of time. But much of what drives your eventual sale price gets built years before a buyer ever calls.
So, if you’re considering buying a business, give us a call at Argent Advisors (318-251-5858). We’ll help you look hard at the numbers before you sign anything.
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Byron R. Moore, CFP® is managing director / planning group of Argent Advisors, Inc. Email him at bmoore@argentadvisors.com. Write to him at 500 East Reynolds Drive, Ruston, LA 71270 or call him at (318) 251-5858.
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