Will the Sale of Your Business Really Fund Your Retirement or help you make the next step?
In the next decade millions of “baby boomers” will be retiring in an uncertain world economy. Many are relying on receiving full value for the businesses they have built over their working life. Others owners will just need or want to sell in that time. Relatively few, will be able to sell their businesses at their full potential value, because:
- There will be fewer buyers than sellers, and
- Relatively few privately held businesses are “Investment Ready”.
In those circumstances, there are a limited number of options available to the selling owner:
- Accept the lower price, or a complicated “buy in” arrangement
- For the retiree, keep working until you have accumulated enough savings.
- Keep working while making the business “Investment Ready”
The alternative is to accept a minimal or zero return by either:
What is “Investor Ready”?
- Closing the business
- Transferring ownership to loyal and long serving staff members
- Transferring ownership to family members, who may not have the desire, or expertise to be successful.
The method & calculation of goodwill needs to be obvious
It needs to instil confidence in the owner about reliability of returns
It needs to have all the systems in place to manage efficiently, including at times a Management Team
The revenue and growth opportunities should be transparent
It may provide a formula or fill a gap in the market, that will provide economies of scale to someone who wants to roll it up into their existing business
To maximise the value of your business, you need to justify higher future profits underpinned by continuing growth. You must be able to demonstrate that any risks of not achieving those profits, have been identified and plans put in place to mitigate or eliminate those risks.
In other words you have made your business Investor Ready!
Growth & Business Valuations
There are many methods to calculate a business’s value, but generally they have 3 components:
- Assets at market value
- Less Liabilities
- Add Goodwill value (usually a multiple of the business’ profits)
The value of assets and liabilities and the attached contractual obligations are usually relatively easy to determine.
However, often there will be differing opinions on the size of the multiple & quantum of profits used to value goodwill. Where there is certainty of continual profitability and revenue growth, then the multiple to be used in that calculation and hence the value of your Goodwill, will be larger. Where there are evident risks to the business and continued profitability is less certain - say from a history of failing to properly plan and manage growth, then the multiple used and your Goodwill, will be reduced.
The failure to properly plan and manage growth is the most common cause of business failure. In particular, significant working capital is required to fund the infrastructure to manage operations and reduce risk in an expanding business.
Typically a purchaser will want evidence of:
- Detailed strategic planning & financial forecasts supporting growth predictions
- Working capital requirements being funded from operations, or within existing credit lines