As a business owner, you probably think of all the things you would like to do once you sell your business and enjoy your next venture. Or perhaps you have plans to travel, learn new skills and achieve personal growth. To do all of these things, however, it is essential that you make plans now to strengthen the value of your business prior to exiting.
To understand what your business is worth, it is essential to first have a business valuation and then to link that valuation to a financial plan. The valuation will help determine if you will have enough money to retire after the business is sold. The difference between your current net worth and the wealth needed to retire is called the value gap. In many situations, the biggest component of an owners’ net worth is their business. Reducing the value gap is generally the most important step in the exit planning process. This is accomplished by de-risking the company. What drives value in the eyes of a buyer is risk. Higher risk companies are worth less to buyers, and vice versa lower risk companies are worth more.
The de-risking process is started by completing an overall assessment of the company. The assessment includes topics such as management strengths, revenue drivers and business contracts. Addressing weaknesses in the company creates value that is transferrable to the buyer. The mission of the exit plan is to create value within the company that is separate from the business owner. Eventually, the business owner will exit their business, and the goal is for value to stay with the company, and not exit with the business owner.
Companies operating at their full potential inherently sell well as they are attractive to buyers. They will also hold their value when the market becomes saturated with businesses for sale. The mergers & acquisition (M&A) market has strengthened in recent years, and it has very much been a seller’s market. However, this will not last forever. With baby boomers beginning to retire, a significant amount of businesses will become available over the next 5 to 10 years.
The market will eventually (sooner than later) turn into a buyer’s market. The increased competition among sellers will begin to drive selling prices down. This is where the true value of the exit planning process comes into play. Even with increased competition from other sellers, a well-run business that is organized and has planned for their exit is more attractive to prospective buyers. Done right, your exit plan will ensure a smooth transition and maximize your company’s financial health, increasing the chances for a profitable sale even in a buyer’s market.
Your business is an asset in which you have invested great time and money. It should be increasing in value so that when the time comes to sell, you will be able to harvest additional wealth. The majority of individuals have advisors managing their financial investments; however, most financial planners estimate that 85-90 percent of the average business owner’s net worth is tied up in their business! Doesn’t it make sense to have an advisor assessing its strengths and weaknesses, as selling the business is the key to your retirement?