Your business is your retirement plan. Here’s how to make it worth what you need

That plan works when the sale price covers the retirement. It fails quietly when the owner learns what a buyer will pay only after deciding to retire. The fix is to run the numbers the other way around, years before you list.

Start with the number your retirement needs

Begin with the income you want, not the price you hope for. Say you need $60,000 a year on top of CPP and OAS. Using the 4% rule as a rough guide, that takes a portfolio of about $1.5 million. If your RRSP, TFSA and other savings already hold $400,000, the sale has to deliver roughly $1.1 million after tax, legal costs and any broker’s commission.

Your accountant can turn that into a pre-tax sale price. For this example, call it $1.3 million. What matters is having a target before you ever have an asking price. Owners who skip this step tend to price on what the business means to them. Buyers price on what it earns.

What buyers actually pay for

Buyers of owner-run businesses price them on the seller’s discretionary earnings, or SDE: pre-tax profit plus the owner’s salary and perks, plus one-time and non-cash expenses. It’s the cash flow a single owner-operator could take out of the business in a year.

The price is a multiple of that figure. Most small, owner-operated businesses in Canada sell for somewhere between two and three and a half times SDE. Where yours lands depends on how clean the records are, whether earnings are rising or falling, whether a few big customers make up most of your sales, and how much the business depends on you.

Now run your retirement math against it. Divide the price you need by a realistic multiple and you get the SDE the business has to show. At a multiple of 2.5, a $1.3 million sale needs about $520,000. If the business shows $350,000, it’s worth closer to $875,000, which leaves a $425,000 hole in the plan. Far better to find that out now than in the first offer.

The add-backs buyers accept, and the ones they don’t

Add-backs are where most price arguments start, because every dollar of SDE is worth two dollars or more of price. Buyers generally accept the ones they can verify: your own salary and benefits, personal costs run through the business such as a vehicle or phone, true one-time expenses like a legal settlement or a move, and depreciation and interest.

They push back on anything they can’t see or that keeps coming back. Undeclared cash sales don’t count, because buyers and their lenders only use income that appears in the financial statements and tax returns. A “one-time” repair that shows up every year is an operating cost. Wages for a family member who really works in the business stay in, since the buyer will have to pay someone to do that job. And “we could raise prices” is the buyer’s upside, not something you get to charge for.

Clean up the books a year or two ahead

The cheapest way to raise your price is to make your earnings easy to believe. Start at least a year before you sell, and ideally two or three:

• Stop running personal costs through the company, so the profit shows on paper without a list of explanations.
• Get accountant-prepared financial statements. Buyers and lenders usually want three years.
• Write down how the work gets done, and hand key customer and supplier relationships to someone other than you, so the business doesn’t walk out the door when you do.
• Check that your lease can be assigned and has enough years left for a buyer’s financing.

Each of these makes your SDE more credible, and credible earnings earn better multiples. At two to three and a half times SDE, cleaning up $20,000 of hidden profit can add $40,000 to $70,000 to the price.

Don’t let tax take the win

In Canada, how you sell can matter as much as what you sell for. If your company is a Canadian-controlled private corporation and you sell shares rather than assets, the lifetime capital gains exemption can shelter roughly $1.25 million of the gain for each qualifying shareholder. The shares have to pass holding-period and asset tests, and many buyers prefer to buy assets, so the structure becomes part of the negotiation. Have this conversation with a tax advisor two or more years out, while there’s still time to qualify.

When the numbers come up short

Sometimes the math says the business can’t fund the retirement yet. That’s worth knowing while you still have options. You can buy time, since two or three years of clean, growing SDE can close a real gap. You can offer vendor financing, carrying part of the price so more buyers can afford it, though that leaves some of your retirement riding on the buyer’s success. Or you can keep the business, put a manager in place and take income instead of a lump sum.

The owners who retire well treat their company like any other retirement asset. They set the target first, then spend the last few years making the earnings match it.