Business Owners’ Perilous Decision: When Do I Sell Out?

We Boil Down The Most Difficult Decision Every Business Owner Must Make At Some Point In Their Lives

One of the single most important calculations to a business owner at some point in time, particularly when contemplating their retirement or “end game,” is the balance between “what is my business worth?” and “will that be enough to comfortably meet my retirement needs?”

In most cases, both of these figures are relatively vague – or completely unknown – numbers when the typical business owner begins to factor in the variety of economic, business, financial, personal and estate planning variables that likely have an effect on those two main figures.

Value of Business Side of Equation

On the “what’s my business worth today?” question, the true value is what a buyer is willing to pay for your business at a given time.  Potential buyers will take into consideration all kinds of factors including:

1. profitability and revenue trends of a business
2. asking price
3. presence of intellectual property
4. expansion opportunities
5. quality of financial and accounting statements and records
6. relationship with landlord(s) and lease obligations
7. experienced employees and managers
8. quality and distribution of customer base
9. market trends of customer base
10. industry outlook
11. barriers to market entry or competitive advantages maintained by seller
12. economic conditions and outlook
13. availability of financing and credit

This is not an exhaustive list, but you can see some of the different factors affecting the value of a business from a buyer’s perspective.

From the seller’s perspective there are the inevitable “what’s the multiple for my business” question.  That refers to vague rules of thumb such as “X business is worth 1.5 times revenue” or X business is worth 2 times EBITA, net earnings or some other units of measure.

The problem with rules of thumb is that they vary from industry to industry and company to company.  More importantly, they are vague and often misleading.

The right route is to obtain a certified opinion of value (COV) from a certified business appraiser.  For a generic small business, this examination should run in the $4,000 to $6,000 range (higher or lower depending on size of business, it’s complexity, and the appraisal firm engaged).  For larger and more complex businesses, the cost can be multiples of that cost.

Just remember that a “certified opinion of value” is an opinion of value and not a sale price.  While the COV is based on objective analysis and uses direct comparison to relevant, current industry data, the actual “value” of a business is the value of it in the eyes of the buyer.  There is no guarantee that you will get a sale price as high as the opinion of value.  You might get higher.  Or lower.

Retirement Needs Side of Equation

Now on the other side of the larger equation of “should I sell now,” is the “how much do I need to comfortably meet my retirement needs?” question.

For this side of the equation, it’s prudent to address this in consultation with a qualified wealth management professional.  There are many variables and scenarios that should be included, along with some detailed financial calculations (net present value of money, estimated investment returns, estimated interest rates, projected taxes, etc.), to do this with any accuracy.

Steps Forward to Addressing Equation

To avoid the vague soul searching of “should I sell now” and “how much is my business worth,” the two gut-wrenching parts of this decision, there is a relatively clear path forward.

The solution is to seek the counsel of two qualified, experienced experts: a business appraiser, and a wealth management professional.

Undertake the two exercises of obtaining a current COV from the business appraiser and a retirement needs analysis from the wealth manager.

Now One Clear Equation

Using the retirement needs analysis as your baseline, does the COV exceed your desired retirement needs?

If so, you have the green light, all other things being equal, to move forward with putting your business up for sale.  (Now comes the part of finding a qualified, experienced mergers and acquisitions advisor, investment banker or business broker to handle the marketing and sale transaction of your business.  Which type of professional depends on the size and complexity of your business).

If the COV does not exceed your desired retirement needs, hold off selling your business for now.

Selling My Business Now Is Not In The Cards

If selling now doesn’t look like the right move, spend your time on improving your business so that when you do an update of this analysis, and the light is green to sell, you are ready to go!

Exit Planning Services From Endorphin Advisors

Endorphin Advisors has an experienced team of advisors to help you through this process.  We offer confidential, expert advice, counsel and project management services to business owners contemplating the sale and exit from privately held businesses.

Endorphin Advisors has a full workshop on preparing companies to be sold.  Please contact us if you are interested in learning more or wish to schedule a workshop.

Exit Planning Services From Endorphin Advisors

Please let us know if you have any questions.

Thank you for your continued interest and support.

Erik Bunaes

Endorphin Advisors

5/11/10

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