Here’s a quick one: A common objection we see from owners exploring an exit is “well if my company is only worth X annual earnings, I could just keep running it.” And you know what? Yes, you could. In fact, you could keep running it until X approaches infinity. Read more
Retirement planning is a long uphill battle. As financial planning professionals will tell you, the sooner you start putting in place a comprehensive plan, the better off you’ll be. Oftentimes, small business owners invest everything into their companies and bank on utilizing the proceeds from the future sale of the business to fund their retirement. With an average sale price of $180,000 for small businesses, this lump sum is far from an adequate base to live off of for the next 20+ years. Granted, the majority of companies that we work with are much much bigger – but our experience is that owners consistently tend to overvalue their companies.
Here are some key statistics provided in an interesting article regarding funding your retirement with this onetime liquidity event:
- Out of 1,987 small businesses sold in Q3 2014, the median sale price was $189,000 (BizBuySell.com).
- By age 65, an average full-career worker needs to have banked 11 times annual pay. That means a household earning $75,000 a year would need to have saved $825,000. Work to age 67 and the multiple drops to 9.4 ($705,000); retire at age 62 and the multiple rises to 13.5 ($1 million).
- EBRI estimates that a 65-year-old couple in 2019 that does not have any employer-provided health benefits will need $450,000 to have a 50% chance of funding health care expenses not covered by Medicare. Even with employer benefits, there is a 50% chance that out-of-pocket expenses will reach $268,000. Plan for this big expense.
- But most alarming is the fact that 43% of small business owners have no formal financial plan in place (Source: Exit Planning Institute).
Still think that $180,000 (or $1.8 million) is enough to live comfortably and enjoy a life of leisure? Even if a business owner believes their business is worth more than this average, it is prudent to work with a financial advisory team in order to determine the true value of one of their largest assets in order to bridge the difference in what will need to be saved and invested over time.
It’s incredibly important to set yourself up for success: well before the decision to go to market you should be arming yourself with two critical pieces of data: what is the business worth, and how much do I need? We call this process “Gap Analysis” – and it’s literally the first step of every exit planning engagement we take on.
Takeaway: Understanding business valuation early, and working with a financial advisor, can help you set the right track.
Here’s a universal truth about earn-outs: buyers love them and sellers hate them. From a buyers point of view, what could be better? We are deferring a portion of the purchase price and transferring risk back onto the seller. From the seller’s point of view…. what a load of horse-hockey! Read more
Running your business requires you to manage dozens of tasks each day, and delivering a quality product or service to your customers is the first priority. Some owners become overwhelmed by daily business operations and neglect their financials, which may cause big problems down the road. Use this list to evaluate your financial fitness and to keep your business on track.
An Example – Getting to Fiscal Fitness
Assume, for example, that Julie owns and operates WoodCreations, a customized furniture manufacturer that generates $10 million in sales each year. The company buys wood and other components parts to create high-end furniture. What to do? Where to start? Good thing we have a handy 15 point plan… Read more
Sometimes when thinking about business concepts it’s helpful to think in terms of consumer concepts. Due diligence – a term you’ll start to hear a lot when buying or selling a company- is a great example. Read more
This won’t come as a surprise, but nearly every business owner who is approaching a sale is focused on realizing the highest possible price. What may come as a surprise though, is that few are focused on the right number. The question “how much can I get for the company?” should always be followed by “after taxes.”
There are a number of issues that are going to alter your post tax proceeds (which is why we always recommend embarking on an Exit Planning Process). With an appraisal in hand, working with a qualified tax advisor is a great way to really drill down on how a transaction might look for you and affect your retirement.
So, what kind of tax are we talking about? Read more
If you’re a financial advisor you’ve likely spent ample time with clients that are focused on the more liquid portions of their portfolio… and ignore the elephant in the room. By ignoring their operating company as a component of their portfolio the entrepreneur is potentially jeopardizing their retirement.
Check out Dan’s latest writing on the topic in Financial Advisor Magazine.
Dan writes “Financial advisors have the unique perspective on a business owners’ personal financial picture, but not necessarily an in-depth understanding of a company’s value. The entrepreneur’s business interests can be complex and difficult to work into a comprehensive financial plan. Pairing an accurate assessment of a business’ Fair Market Value with your financial planning process can yield deep insights for entrepreneurs… and deepen client relationships with advisors.”
ICYMI – Article originally appeared in 2015…. updated and revised for 2018!
While getting my daily dose of Quora this morning, someone posed the question “What are the Top 5 Questions a VC should ask a startup?” Lots of good responses are in there, but Patrick Mathieson @ Toba Capital really had a great response.(Really suggest you head over to read directly) While Patrick’s response is geared towards the startup / VC world, his response really has broad application across mature companies as well. Read more
We’re engaged by folks to perform valuations for a wide variety of reasons (litigation, death and taxes – you name it). But some of the smartest and most successful business owners engage us simply to understand the value of their business now. Why? Because there are they are attuned to these 5 things that ultimately increase net worth and smooth the path to a successful retirement: Read more
Quantive is a verteran owned and operated financial services firm. We work exclusively on matters related to corporate value: business valuation, value growth, and M&A advisory.
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