By Michael Torney, J.D., CFP®, LL.M., CEPA
What got you here won’t get you there. No, not the famous book by Marshall Goldsmith. The idea is the tactics and strategy you used to build your business to this point will not be useful in the phase of selling it. A business owner needs to learn a few key aspects of what must be known before selling a business.
Your Wealth Gap – First, you must know what you need to sustain your lifestyle. Your wealth gap equals the assets you need to sustain your lifestyle minus the assets you have outside of your business. Many business owners have 80% or more of their net worth tied up in the business. The gap represents what the business must sell for after taxes and fees. A qualified exit planner can model this for you.
Your Profit Gap – This is the gap between the profits your business generates and the profits a similar business generates that operates at a best-in-class level. If your business generates $1M revenue at 10% profit, but a best-in-class operation has 15% profit, wealth gap is $50,000 [($1M * 15%) – ($1M * 10%)].
Your Value Gap – This is the business value left on the table by not operating at best-in-class standards. The equation takes your earnings before interest, taxes, and amortization (EBITA) x your company’s multiple and compares that against the same equation for a best-in-class multiple operating on the same EBITDA. This number is often quite large. Not all of it may be attainable depending on an owner’s timeline and risk tolerance.
Your Timeline – How much time are you willing to stay in the business? Are you open to a phased retirement? Do you need to be out in 12 months? Many of the improvements to the value of a business’s EBITDA or multiple require time. Having a clear understanding of your timeframe will allow your advisors to focus on the right ways to improve your sales price.
Your Risk Tolerance – building your business took a lot of risk. Many owners discount how much risk they endured along the way. At this point, many of the value enhancements will require some level of risk. Putting together a buy-sell agreement may be very low risk but what if you need to increase sales to meet best-in-class sales metrics? Are you willing to do some hiring and wait for the change in sales? Having a rough idea of your risk tolerance will help your advisory team.
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