Business Evaluations – Will Growing Your Business Help You Sell It?

Business Evaluations – Will Growing Your Business Help You Sell It?

 

Will Growing Your Business Meet Your Future Wealth Needs?

This post is for those business owners who have completed brief business evaluations,i.e.crunched the numbers, and recognize that the amount they have accumulated (including the value of their business) is currently less than the amount needed to fund their retirements. (If you haven’t done this calculation yet,  do so now for free using my Business Valuation Calculator.)

The Fundamental Question – Will Growing The Business Fund The Gap

Many, maybe even most, business owners take it on faith that if they grow their business, it will automatically translate into a greater return to them when the business is sold. Very few go through any analysis to quantify this assumption. In reality, growth does little to increase the ultimate value owners will receive from the sale of their businesses in a sizeable number of cases.

Quantifying Growth’s Influence on Value – The Three Variables

There are three variables that need to be accounted for in determining whether growing a business will increase the net value to its owners.

• Time – How long from the current period until the desired exit
• Capital Required to Fund Growth – How much and in what form (retained earnings, borrowings, etc.) are needed to fund the projected growth
• Payback Period – How long will it take for the growth investment to return the capital invested

General Rules for Determining Whether Growth Will Increase Net Owner Value

• The shorter the period to exit … the greater the capital needed to grow … the longer the payback period – the less likely that growth will increase owner value
• The longer the period to exit … the lower the capital needed to grow … the shorter the payback period – the more likely growth will increase owner value

So don’t take it as a given that a growth strategy will pay you back in personal wealth when it’s time to leave your business. Use thoughtful business evaluations and the general rules stated above to determine if growing the business is the key to helping you leave it.