After years of hard work, business owners often look forward to a well-deserved retirement. The typical business owner has over 80 percent of their net worth locked up in their company, so those golden years are typically funded by selling the company and investing the proceeds into an investment portfolio to create income.

If you are pinning your hopes on the prospect of selling your business quickly when the time comes, consider this: statistics reveal that only about one-fifth of small businesses that go to market will find a buyer, according to a national report from the online business exchange company, BizBuySell. It is an alarming statistic for business owners hoping to cash in on their life’s work. Most of the time, their efforts to sell will lead nowhere.

The transition from expert to entrepreneur

It’s not uncommon for people who are experts in their field to move from a W-2 employee to starting their own company. According to the U.S. Census Bureau, nearly 5.5 million businesses started in 2023. That beat the record of 5.4 million new businesses created in 2021. I’ve seen this ambitious shift with information technology service people, plumbers, lawyers, electricians, chefs, landscapers, and many more professionals.

These American entrepreneurs are bright, ambitious, and motivated. They’re also fearless because they know that 30 percent of new businesses fail within two years, according to the Small Business Administration. Half of new companies don’t survive beyond five years. And a whopping 70 percent of new businesses collapse by Year 10.

If your business has survived up to your target retirement date, you’ve been more successful than most. Unfortunately, you may be unable to unlock the value of your hard work unless you plan accordingly and move from owner-operator to true business owner.

The importance of building a transferable business

The best way to ensure a long-lasting company is to build it as if you’ll sell it; make it profitable, well-run, and transferable. Many owners understand and strive to achieve those first two components: earning a high income and hiring competent staff. Unfortunately, too many owners don’t consider transferability, which is a measure of how easily an acquirer can take over the company.

In the last few years, I’ve seen this play out in Berkshire County for two physicians and three accountants. I don’t have enough fingers to count how many lawyers in the rest of Massachusetts closed shop because they couldn’t sell their practice.

The challenges of untransferable businesses

One physician (we’ll call her Nicole) made a great living running her own practice, saved well, and decided to retire when she had $2 million of cash on hand to invest and replace her income. She was the sole physician in her ten-person firm. When she approached her money management team about retiring, Nicole had them plug an additional $5 million into her financial plan. She assumed she’d get that much from selling her practice. That was four years ago.

Nicole could not transfer the practice to a new owner because, in part, any acquirer would have to step in and do her work. Nicole has a client list, which is valuable – but not as valuable as a transferable business.

Nicole recently decided to enter semi-retirement instead and work fewer hours. The short-term retirement math works for her — enjoying some time off and earning some income. However, while Nicole tried to sell her practice over those four years, she should have hired a W-2 employee physician to make her practice more transferable. Now, Nicole’s dwindling client list is less valuable than it was four years ago, and even if she could sell the business now, its declining revenue puts a stranglehold on its valuation.

An accountant (we’ll call him Matt) decided to retire in 2022 and had to walk away from his practice in 2023. Like Nicole, he was the sole skilled professional at his firm. If he had been able to sell his business, the value would have been in the client list, property, and equipment, but not the untransferable entity.

A nationwide shortage of public accounting professionals made hiring a replacement challenging. To successfully sell his practice, Matt could have benefited from thinking outside the box instead.

In most local markets, highly skilled owner-operators see their business as an opportunity for an up-and-comer to step in and take over. The problem with that is a lack of funding for the buyer. Instead, Matt could have joined a national accounting organization a couple of years before retirement and let the larger organization pay him for maintaining client relationships.

Nicole and Matt both could have relied on modern technology and outsourcing to developed, well-educated foreign professionals. India, for example, is flush with bright and credible experts offering telehealth and remote tax compliance. In the absence of a sale, Nicole and Matt could have used this strategy to widen profit margins and reduce (or eliminate) their required time. For many U.S.-based companies, this is also an option to service low-margin customer bases.

Other pitfalls in selling a small business

Why else do small businesses fail to sell? One big reason is that the owner often does not have a realistic sense of how much the business is worth, even after obtaining a valuation. Upon seeing the report, the owner is incredulous, even indignant. “It must be worth more!” they’ll exclaim. After all, they lament, they devoted thirty years to the place. However, time does not directly translate into value.

Nonetheless, the owner enters the market with high expectations, insisting on a price that drives many buyers away. Buyers want to see a professional valuation, audited financial statements, trend reports, and tax returns, which are often missing or inadequate. Even if the price comes down to a more reasonable level, the seller may be reluctant to budge on the terms, and such intransigence scuttles many deals.

At this point, the seller is generally intent on retiring and unwilling to go back and institute the improvements to build actual value. The business may continue for a while, but eventually, it fades away, and with it go a lot of dreams that might have been.

It is interesting to note that the larger the business, the more likely it is to find a buyer. The reason is not simply that such companies have higher revenue. They are often bigger because they are run professionally and, therefore, will sell more readily. These firms took more of the proper steps, which is why they grew. All along, they did more of the things that buyers needed to see, making them more transferable.

If you’re planning to retire on the proceeds of your business sale, it’s critical to start planning early. Bring on employees or outsource labor so you can transition from owner-operator to owner, focus on creating a transferable business, and understand that it may take time to find the right buyer.

And once you do, remember that your business, while a result of your life’s work, may not be worth as much as you think it should be. It’s better to sell your business for less than to let all your hard work — and potentially 80 percent of your net worth — fade away.

This article first appeared in the Berkshire Eagle on March 1, 2024.