Planning To Cash In Your Business For A Comfy Retirement? You Have A 1 in 4 Chance of Success
Planning To Cash In Your Business For A Comfy Retirement?
Small Business Owners Have A 1 in 4 Chance of Successfully Selling Their Business.
Read on to find out some of the things that make small businesses less desirable than larger businesses, and this will give you some ideas about how to prepare your business to be sold.
Here are some statistics on sales of businesses in the U.S.
- Less than $750K revenue, 18% are sold
- $750K – $2M revenue, 25% are sold
- $2M – $30M revenue, 29% are sold
- $30M+ revenue, 33% are sold
Source: CABB & Tom West
This means that if your business has less than $750,000 in annual revenue, there is less than a 1 in 5 chance that you will be able to sell it. Even once you get up to $2,000,000 in sales, there is only a 1 in 4 chance of selling your business.
This means that the higher the revenue, the better chance of selling the business.
This is not so much just a revenue target, but reflects the fact that larger businesses have some things that smaller businesses generally do not:
- More established operating systems & procedures
- Stronger management teams
- Specialized, experienced staff
- Better marketing strategies and tools
- Ability to effectively compete in their target markets
- Broader product or services offerings
- Deeper client bases with repeat customers
- Wider geographic reach
- More established partner, alliance and vendor relationships
If your retirement plan and golden years are relying on you successfully selling your business for a nice, big chunk of cash, you may have some work to do between now and then to increase your odds of achieving that comfortable, leisurely retirement.
Learn more about exit strategy planning and some of the things you can do before you try to sell your business that will attract buyers to your business.
Please let us know if you have any questions.
Thank you for your time and interest.
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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:
- profitability and revenue trends of a business
- asking price
- presence of intellectual property
- expansion opportunities
- quality of financial and accounting statements and records
- relationship with landlord(s) and lease obligations
- experienced employees and managers
- quality and distribution of customer base
- market trends of customer base
- industry outlook
- barriers to market entry or competitive advantages maintained by seller
- economic conditions and outlook
- 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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Top 10 Mistakes In Selling a Business
Top 10 Mistakes Made When Selling a Business
Selling a business takes both careful preparation and the ability to handle a complex transaction. Since most business owners are not experienced in selling a business, they will make mistakes along the way. Here are 10 of the most common mistakes to avoid:
1. Not learning the ropes. Like anything you do in business, there will be a learning curve when it comes to selling a business. Learn the terminology and how the selling process typically proceeds so that you can structure the deal properly and come out a winner.
2. Setting a price too soon. You set yourself at an immediate disadvantage if you state a price without knowing the potential value of the business. Do not sell yourself short by setting a price too quickly. Assess the value of your business very carefully with your accountant or financial advisor and your attorney, and then set a price. Remember, you can always come down, but you generally cannot go up once you have determined your selling price.
3. Selling too quickly. Unless you have to sell the business quickly for financial or personal reasons, you should not rush to a sale without exploring all of your options to determine whether or not you are getting a fair value for your business.
4. Lack of confidentiality during the sales process. Once word gets out that the business is being sold employees may leave, vendors may hold back on deals, and customers may head to your competitors. The value of your business can drop quickly if you do not maintain confidentiality.
5. Not increasing the value. Owners who know well in advance that they want to sell the business have time to build up the value and make it more attractive to buyers. There is a lot to be said about first impressions, and in this situation, a poor first impression can have a significant impact on the potential selling price of your business.
6. Not identifying the best buyers. You need to spend time on serious buyers only. If a potential buyer is not pre-qualified or does not appear to be prepared to make an offer, you may very likely be wasting your time. Do not spend time with the wrong buyers.
7. Being unprepared to defend your valuation. If you have worked hard to create a value for your business, you should be prepared to defend and substantiate that value. Prepare backup materials to defend the value of your business.
8. Failing to negotiate. How much leverage you have may depend largely on how many potential buyers are out there. Nonetheless, you need to be prepared to negotiate, and for this reason you should have professional guidance when you sell a business.
9. Waiting too long to sell. Many business owners regret not selling at the most opportune time. By waiting, they subsequently encounter increased competition or have a product that has declined in value because of economic conditions. If you are thinking of selling, pay attention to changes in the economy and to the state of your industry, and look for the best selling opportunity.
10. Not using the skills of professionals. You should seek out sound business and legal advice from professionals who have been involved with the sale of other similar businesses. Selling is a complicated process and not one that you should take on without expert assistance.
(From AllBusiness.com)
If you have questions about the selling process, or are starting to think about selling your own business – whether that may occur in the next year or two or several years down the line – contact us to learn more about how we might assist you with the process of preparing for the ultimate sale and exit from your privately-held business.
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