I hear this question all the time. As owner managers look forward to retirement, their company represents a large portion of their retirement assets. How much is this retirement asset and when is the right time to sell?
Once it has been decided to (at least) consider retirement, I get the request, “Please value my business so I know what it is worth and the price I will get”. The words value, worth and price tend to be used interchangeably as though they have the same meaning, but they are quite different in the context of selling your business.
The word “value” is used in the mathematical and theoretical context. A business valuator (typically with a CBV designation) estimates the expected future profits and cash flows of a business. Depending on the business, other factors might be considered (in the CA business, annual revenue, not income, is a large determining factor). To determine an appropriate multiple to apply to cash flows or income, a required rate of return is estimated (usually 5 – 7%). Once the multiple is established, it is multiplied by either or both the cash flow and profits to determine the value of goodwill. From there, the value of the shares or the assets can be determined. Whew! There are a lot of financial estimates about the future and theoretical assumptions involved in coming up with the estimate of value.
“Worth” relates to the individual. How much is this company worth to me? How much is it worth to a prospective buyer? Every company will be worth a different amount to different people. I have seen companies that were at or near bankruptcy sell to a buyer who turned it around to make a lot of money. The company was worth nothing to the original owner but a lot to the buyer. In the context of your business, the company is worth not just the profitability of the company but also the ongoing remuneration taken by the owner. If a company makes $100,000 per year and the owner manager takes $150,000 as a salary, the owner manager will have to replace $250,000. If the $150,000 was used for personal lifestyle and the $100,000 was used for savings, how long will it be before the savings are used up? Will the individual outlive his/her retirement savings? On a financial basis, you should ensure that the assets, after the sale of your business, will be sufficient to last for the rest of your life. If not, maybe you should put off retirement for a year or two.
“Price” relates to the amount that will be paid at a point in time. I read about a $2 bill that sold for $20,000. I certainly won’t be the one to make such an offer, however, if you happen to be in the right place at the right time in business, the theoretical value takes a back seat to personal preference and “I’ve got to have this company”.
Plan for the future:
- Meet with your investment advisor to determine your retirement needs.
- Plan with your accountant and tax advisor to minimize current, future and estate tax.
- Meet with a CBV (chartered business valuator) to estimate the value of your business.
- Make sure each of your advisors is aware of the information provided by the others. A consolidated plan from all your advisors will be the most effective.
What’s your business worth? I say: your future financial freedom.