Are Business Owners Aiming at the Correct Target?

The first thing that comes to mind for business owners when they are thinking about exiting their business is the valuation or how much is their business worth.  Why is that?  Really what good is the valuation?  It is the number that other business owners brag about on the golf course.   It also allows you to measure whose business was the most successful.  Those are extremely import reasons, however as you will see valuation may not be the right target.

For many business owners bragging on the golf course is not the ultimate plan.  It’s being able to afford to play on the course everyday and enjoy their retirement after all their hard work.  Before selling a business, owners need to consider several things before valuation.  First how much money will they need to retire (A).  A qualified wealth advisor can answer that question.  Once that number is determined, they need to determine their assets held outside the business (B).  By subtracting (A)-(B) the gap to afford retirement is determined.  The retirement gap is the most important number and the right target.

The retirement gap can then be compared to the expected cash proceeds from the transaction (valuation less taxes and other expenses associated with a sale).  The difference in the retirement gap and the cash proceeds from the sale will determine the options and timing available for a successful exit.

Proceeds Exceed the Retirement Gap

If the expected cash proceeds exceed the retirement gap, the owner will have many more options and have greater control during a potential transaction.  This would allow them to explore different types of buyers.  Instead of a financial buyer that wants to gut the company, they can consider selling to management or possibly family.  If money is not the main motivator they can takes steps to protect their legacy and employees.  The possibilities are endless.

Retirement Gaps Exceeds Proceeds

If the retirement gap exceeds the expected proceeds, options for a successful exit are limited.   The buyers may need to be limited to a strategic buyer and the possibility of a long earn out period may need to be considered.  The transaction could also be delayed.  This will allow the owner to work on the value of their business to cover the shortfall.  During this delay every effort should be made to transfer money from the business to personal accounts to reduce the gap.

It is very easy for owners to become pre-occupied with valuation.  However, as you can see, by itself it does not really determine all that much.  Owners need to understand their retirement gap, and if a potential transaction will give them the retirement they have worked hard for and deserve to enjoy. All they need to remember is; the smaller the gap the more options an owner will have to exit successfully and reach their retirement goals.  Now that’s worth bragging about on the golf course.

 

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