By Lloyd R. Manning
Many real estate brokers are greying and the enthusiasm that propelled them for many years is disappearing. For some, retirement is not that far away. Others think they are going to live forever and can continue indefinitely until one day they will sell the brokerage and gallop off into the sunset. A worthwhile goal but seldom attainable! Perhaps this is the principal reason why after many successful years, many brokerages and their brokers just disappear.
For midlife real estate brokers the time to start thinking about the future is now. It’s time to commence planning, if not for retirement, then certainly for winding down and passing the management responsibility to someone younger. This brings up a host of challenges for which there are seldom simple answers, but it is never too soon to start the planning process.
A transition and successful divestment is perplexing and time consuming. There are many ways this can be accomplished. Resolving the personal and business issues can be difficult at the best of times and will be more onerous if you are uncertain about your longer-term objectives. The germane issues revolve around the age at which you wish to step out, personal health in the event you will not be able to carry on until then, family considerations, financial concerns, retirement needs, procedural matters and whether you wish to remain where you are or relocate.
You can never start planning your exit strategy too early. Many experts suggest that five years prior to retirement is the optimum time but others think it should be sooner than this. Many otherwise astute business persons postpone making these plans because they cannot accept the fact that some day it will be necessary to move on. They unwisely put off important decisions until another day. Delaying the planning process could bring about unintended consequences and probably reduce your brokerage’s value. It is wise to develop a written exit plan, one that sets out your objectives, details your constraints and documents how you plan to achieve these goals.
The initial steps include:
* Creating an exit plan that includes a divestment strategy.
* Identifying your most important objectives.
* Formulating a critical path timetable. This is deciding what comes first, second, third and so on.
* Determining your anticipated retirement needs and the best way to maximize your retirement savings.
* Documenting your goals. Establishing the best way for you to attain these goals and proceeding from that perspective.
* Addressing the potential legal problems and tax consequences.
If selling the brokerage on a given future date is the objective, give yourself a one- to two- year head start to accomplish this goal. Before offering it on the market, ensure that you have a clear understanding of all of your options. There are several paths you could take, each depending on how you want to get out and the length of the transitioning period. Make your plan flexible in case you change your mind about the timing or if circumstances over which you have no control change.
Always have your draft plan examined by legal and accounting experts. There is little point in going through all of this only to find that at end of the road, your gains are frittered away to the Canada Revenue Agency or you could potentially have unworkable covenants in your divestment action plan.
The process of phasing out of full-time management and gradually moving into a lesser position, or taking more time off, is a popular method of retirement planning and execution. One of the better methods is to arrange buy-in/buy-out. The term “buy-in” refers to the purchaser and buy-out refers to the seller. With this procedure an orderly transfer of your real estate brokerage is made bit by bit over a pre-stated number of years – never less than two and seldom more than 10, with five to seven years the most common.
The selling/purchase price is agreed to at the time the contract is signed. With the buy-in/buy-out, although you could bring in an outsider and sell to him the usual practice is to sell your interest to an employee or to a partner. The difference between this and an outright sale is that although it is a form of seller financing, you remain active and in control of the brokerage as a transitioning seller or partner until the full debt owing to you is retired. However, there is no typical template that fits all situations. You require the best legal and accounting advice. Even with the best structured buy-in/buy-out there should be a down payment of sufficient size to ensure that the buyer/partner does not walk.
It cannot be said too often. Phasing out – winding down – transitioning from active business management to a comfortable lifestyle in retirement must be a planned exercise. It can never be a case where on an appointed day somewhere in the future you will gather up your personal possessions, put your hat on your head and with a wad of money in your jeans, walk out the door. An exit whereby you depart with your health, your wealth, and yes, your reputation for running a good real estate brokerage intact will take meticulous planning and methodical execution.
Start now, not someday when it becomes a do or die situation or when for some reason you must get out. Consider all you options. Select the one that works best for you, get the best legal and tax advice and do it.
Lloyd Manning, AACI, FRI, CCRA, PApp is a semi-retired commercial real estate and business appraiser and broker who now spends his time writing for professional journals and trade magazines. He resides in Lloydminster, Alta. Email lloydmann@shaw.ca
