How Much is that Doggie in the Window?
By: Tom Kirk
I have written previously about the importance of first answering the three W’s that surround a business transition: Why, What and When? Your answers to these questions will get you started down a path toward the future you desire, and help you to answer the next questions: Who, How and How Much? This blog addresses How Much.
Do you ever find yourself interested in a big ticket item and are surprised when you find out just how much it costs? The flip-side of the same coin can happen when it comes to what you think your privately held business is worth. You can think it is worth a lot more than someone may actually be willing to pay for it.
Your position is understandable. You have put your heart and soul into your business. It has provided a good lifestyle for you and your family for years. It is worth a lot to you. But where the rubber hits the road is at the price which a willing buyer and a willing seller agree. There are rules of thumb about business values based on a multiple of revenues and / or profits. You can hire someone to do an expensive, formal valuation of your business. But since most privately held business sale transactions are private, comparable sales (upon which these rules of thumb and valuation methods are based) are either impossible to find or are likely not for the sale of a business exactly like yours.
Instead of getting frustrated trying to precisely determine the value at which your business might sell to a willing buyer, the following big picture analysis may be a better approach.
For many privately held business owners the proceeds received in exchange for their ownership interest must be sufficient that, when combined with their other resources, will provide for their financial independence for their rest of their lives. If they sell their business, they will likely be foregoing the significant cash flow they were receiving as the business owner, and that cash flow will need to be replaced.
The amount of proceeds necessary to create this financial independence for the selling owner can be determined using The Future Wealth ProjectionTM tool of The Transition Roadmap DeveloperTM process. Here assets (including an estimated value of your business) and liabilities, income and expenses are summarized and your future financial condition is projected. Through sensitivity analysis you can determine the value you must receive in order to achieve the projected financial condition you desire.
Next you need to compare that value you just determined you need to receive against that which the market may deliver. This is where rules of thumb, soft valuations and industry knowledge of actual transactions can be very helpful. You aren’t trying to build a legal case for the highest value of your business, but are trying to get a feel for whether or not what you need is close to what you may get.
There are two possible outcomes with various actions that can come from this analysis as follows:
This big picture analysis, built upon the answers to the questions of Why, What and When, provides clarity about whether a business transition is possible in the near future, or if other actions should be taken at this time instead.
All of this is predicated upon having the opportunity to plan your business transition vs. being forced into one as a result of unexpected circumstances such as the death, disability or other incapacity of one or more of the business owners. Unfortunately, most privately held business owners do not proactively chart their Transition Roadmap and instead can find themselves in a reactive mode where choices are very limited, and the full value of their business interest is not realized by them or their family.
That is why we offer The Transition Roadmap DeveloperTM; a transformational process that takes into consideration the practical, financial and emotional aspects of your unique business transition challenge and delivers a customized step-by-step plan of actions.
All businesses transition eventually. Be intentional about how you want this to happen. Call today and schedule your complimentary consultation with one of our WealthCoachesTM to see if The Transition Roadmap Developer is the process you may want to investigate for improved clarity in this critically important area of your personal and business life.
You should not assume that any discussion or information contained in this publication serves as the receipt of, or as a substitute for, personalized investment advice from FirstWave Financial. A copy of the FirstWave’s current written disclosure statement discussing our advisory services and fees is available upon request.