Most business owners plan to fund their retirements or next big adventures with the net proceeds realized from the sale of their businesses. In order to meet financial and personal goals, there are a few basic questions to answer: How much do I currently have and how much can I get for my business? Those answers create the starting point for determining if you have value gaps and when (and how successfully) you can exit your business.
Let’s look at an example:
John owns ABC Company. Working with his financial advisor, they calculated a realistic assumption about the rate of return for his investments outside the company, established the post-exit annual income, and researched the anticipated life expectancies for both him and his wife. John would like to exit in five years at age 63.
John has to know the value of both his personal investments and the value of his company in order to determine if there is a gap between what he has today and what he needs in the future. When he quantifies that number, he can put a plan in place to close the gap – but he has to know the number to start.
John and his wife determined that they could enjoy retirement living on $200,000 per year and estimate that they’d need that for thirty years. Working with his advisor, John estimated his projected rate of return on personal investments would be $500,000 in five years, his target exit date.
Next, John’s advisor calculated that the amount of investment capital needed to return $200,000 annually for 30 years would be approximately $3,000,000. That means the net proceeds from the sale of ABC Company would need to be $2,500,000. However, the business is currently valued at $1,500,000. John has a $1,000,000 gap. That’s the bad news. The good news is that John has five years to close the gap and is working with an exit advisor to take the necessary steps to improve the value of his business, so he can meet his financial and personal goals.
Perhaps you can relate to John’s situation. You may have a gap between current resources and what you’ll need to enjoy your retirement or the next chapter of your life. Additionally, you may have a gap between the current value of your business and what it could be worth.
Your first step is to realistically quantify the numbers. I’ve seen too many business owners who make assumptions about the values of their enterprises, only to get an unpleasant surprise when they learn their estimates are too high. Typically, that leads to them working in their businesses longer than they’d planned or altering their goals.
I’ve also seen a lot of business owners who don’t have a gap between their current resources (including business value) and future needs, but they don’t take steps to improve the values of their businesses and walk away from closing leaving hundreds of thousands of dollars on the table!
In either scenario, an exit advisor could have and would have helped. Now is the best time to start evaluating any value gaps that may affect your plans and create the plan to close those gaps.
