Help! I’m Burnt Out and Want to Retire: A Small Business Case Study

As a result of Finagraph’s banking and business owner seminars, I occasionally get asked to step in as a consultant to help small businesses. The most common challenge they seek help with is retirement planning. Their question – “I want to retire, but don’t know where to start.”  It’s natural to be apprehensive when your life is about to make a dramatic change, but thinking about it early and taking the right steps can ease your fear.

We preach that a successful business owner starts with the end in mind.  After a seminar in Las Vegas last fall, I was approached by a couple who own a professional services firm in Los Angeles. They were in this exact situation – looking to retire, and hoping to transition ownership of their firm to their son.  The business is 30 years old, and the son has been with the firm for the past 11 years.  It’s a profitable company with a niche service, ripe for growth or sale. 

They engaged me as a consultant and together we evaluated a buy offer they had recently received from a larger firm.  Ultimately, we declined to sell mainly because it did not satisfy the goal of reaching their “transferrable value” number, or the amount of money they needed to retire and live the life they dreamt about.  So it was back to the drawing board. 

Three to five years is the guidance I gave them for reaching their retirement goal.  Upon hearing this, the CEO calmly stated, “I just don’t want to do it”.  He was ready to go, and I mean yesterday. He’s about 10 years older than his wife and founder-itis has set in.  He’d met the burn out point in his current position and considered himself R.O.J. – retired on the job.

The company is solid and very well run.  After running a Finagraph analysis, we saw that it was performing well above its peers in almost every category except one critical one, collecting on accounts receivable.  The biggest problem in this company is not a lack of cash, it’s a lack of cash management.  Poor stewardship of the cash flow has resulted in the owners having to dip into their retirement account to cover expenses like income taxes.  At this stage in the game, withdrawing from those accounts set aside for retirement is taking a huge step backwards.  My immediate priority was to reverse this trend and set policies in place to prevent the need for another injection of funds from the owners.

To do this, we created two restricted cash accounts and diverted a percentage of funds received towards those accounts.  The first account is a set aside for the income tax liability; the second was to create an internal working capital line of credit.  In the past few years, they have been paying off all debt and are on track to be debt free in the next 18-24 months.  On a side note, the company’s MARQ™ score (small business credit score) is an 88 out of 100, where the industry average is only a 44.  This company is in a very good spot.

Next we placed a monetary cap on the amount of money that we’ll hold in the operating account.  Any money over they cap will be transferred into an account designed to hold the owner’s distributions.  The distribution amounts will be placed directly into their retirement accounts, contributing to our transferrable value amount. 

This is a work in process, but in the last six months we’ve been able to maintain all salaries, set a new sales growth goal, meet our expected restricted cash account goals, and most importantly have a goal of letting the CEO formally retire or move into a part time position at the end of the summer. 

With better processes and some financial discipline, we’ve accelerated his retirement and have his wife set to join him by the end of year 3.  Stay tuned to see how the story ends.