No doubt many baby boomer business owners are looking forward to exiting their businesses and enjoying retirement. Yet many of them will find that what they can make from selling their business will not be what they need to retire comfortably. This can be true even if the business is profitable and has many customers. The five questions discussed briefly below are not all the things that an owner should look at, but they are the some of the major ones. An owner looking to maximize the sale price of their business needs to have a solid answer for each of these questions.
How much do I want (or need) my business to sell for? – Start with this question first. In answering this question, remember that you’ll have lots of time on your hands and will probably want to travel or engage in activities that will take some cash. Add in all your living expenses and you will have a number that is appropriate for the lifestyle you want to live. Add 100% to the number for inflation, changes and emergencies. Now you have a target. Working with a financial planner can help you determine this number with greater accuracy.
Is my business attractive on paper? – Is there a lot of debt on the books? Are there owner draws or perks not reported in the financial statements? Are cash flow, and sales growing or declining? A buyer will look first at sales and cash flow to decide if they should look more seriously at your business. If you’re like most people, you’ve run your business to minimize taxes. All of those perks, contributions and draws need to be identified so they can be added back into the cashflow of the business. Remember, the buyer will not only have to run the business but also support the loan they got to buy it on the same cash flow. The more sales and cash flow you can justify the better.
How easy is my business to run? – Do you have to be at work everyday, or tethered to a cell phone for your business to run smoothly? Do you have a management structure in place that takes care of the details of the organization so you don’t have to? Can any of your employees leave the business and it wouldn’t skip a beat? Systemization is the industry term for making every aspect of your business as routine as possible. It means that everyone knows how the whole business works and how to do their job and several other ones as well. Businesses that can run without the owner are called ‘Turn Key” and generally bring the highest price at sale.
Do I have special knowledge that makes me indispensable to my business? – Are you the primary contact for all your customers? Do you have special industry knowledge that makes your business profitable? Do you negotiate all the contracts? If you are unable to transfer your special knowledge to an employee or even better to a system, making the business ‘Turn Key’ will be difficult and the sale price will be reduced to the value of the customer list and assets.
How much can I get for my business? – After taking into account the factors we just discussed, look at your financials again. If you were purchasing your business, what would you pay for it? Are sales and profits high? Is cash flow stable so that all the expenses are met at the end of each month? Could someone with minimal experience or lack of specific knowledge take on your company and make the same or better profit? If you’re honest with yourself, you will probably be surprised at the impact these questions have on the value of your business.
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