What is My Business Worth?

What is My Business Worth?

Are you wondering "What is my business worth?" and more importantly "Will it pay for my retirement?"

This brief video shares the true life example of a business owner who struggled with this same question and the steps he took to resolve it. Taking the first step is easier than you think.

How to Calculate the Value of a Business

How to Calculate the Value of a Business

When contemplating the sale of your business or succession planning, it’s important to understand how to calculate the value of a business in relation to the actual cash return it will provide to you, the owner.  To that end, I’m going to share two examples of how the sale of a smaller business unfolds for an owner, by the numbers. Today’s example is describes a business with annual sales of $2.5M and next week I’ll share an example of a larger business.

*Note: the examples below put each of these cases into a highly favorable light. In reality, most businesses will have made decisions in the past that will inhibit them from getting these results.

Sample One – Smaller Business

Assumptions:

• Annual Sales – $2,500,000
• One Owner – Compensation of $150,000
• Business Free Sustainable Cash Flow – $250,000
• Tax Rate on Sale Proceeds – 25%
• Earnings Rate on After-Tax Proceeds to Fund Lifestyle – 5%

How it unfolds:

• Valuation of Business at 4 Times Cash Flow = $1,000,000
• Tax on Sales Proceeds = $250,000
• After-Tax Proceeds from Sale = $750,000
• Earnings at 5% = $37,500!
• Loss of Lifestyle = $112,500…A 75% Hit!

If you’re curious about how your own business may be able to fund your retirement, the free Business Valuation Calculator on this site is a great way to quickly and easy crunch your own numbers right now.

Growth is Not a Formula for Selling a Small Business

Growth is Not a Formula for Selling a Small Business

Running Harder But Staying In Place

The Podolny Group worked with a chain of restaurants that dramatically demonstrated that there is no formula for selling a small business. Our initial evaluation showed a gap between the current value of the business and the owners’ goals.  The owners suggested opening five new locations (one a year) under the classic assumption that the growth would lead to greater owner value.

New locations required a capital investment of $500,000, had a payback period of three and a half years and were to be funded by debt. The owners’ time horizon for exit was five years. When we ran a projection for this scenario, the owners were shocked to find that the net value to them was only $100,000 greater than if they opened no new locations!

Why Growth Didn’t Pay

While the owners were shocked, the reason was simple and logical. With the addition of $500,000 of debt and a three and half year payback period the company had substantial additional debt on its balance sheet at the end of five years. Although Sales and Earnings were higher leading to a higher Enterprise Value (the gross value from a business sale prior to paying off any debt), the subtraction of the increased debt brought down the net value to the owners substantially.  On the other hand, under a no growth scenario, Sales and Earnings were lower resulting in a lower Enterprise Value, but the company accumulated a significant amount of surplus cash.  Surplus cash is typically not included in a business sale and goes directly to the owners thus increasing the net value to the owners. The question had to be asked; why work harder and add the risk of more debt when the reward was essentially the same?

Conclusion – Run the Numbers

Not every situation will have this result. The key is not to make an assumption. Analyze. Crunch the numbers. Then adopt strategies and tactics that are harmonious with the realities of increasing business value and meeting the goals of the owners. That’s the true formula for selling a small business.

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.