Valuing Your Business

Most owners of privately held businesses take salary, expenses, and bonuses out of their businesses to fund their lifestyles. In fact, one of the great benefits of owning and running your business is the freedom to control your financial compensation each year. However, if you are thinking about an exit, you must consider that your future owner will also want to enjoy the benefits of ownership. As a result, your ability to draw salary, deduct expenses, and take bonuses will be diminished or eliminated, leaving a value gap. The value gap represents the present-day value of your future needs and goals that must be financed by your business sale proceeds. This critical calculation is the 1 st consideration to be made by all owners who want to explore an exit.

After determining what you need to net from the business, the logical next step is to determine what your business is worth today. This is easier said than done because, as the saying goes, value (like beauty) is in the eye of the beholder (or, in this case, the future owner). As a result, your company will have a range of values depending upon who you choose to transfer the business to. Knowing this range of values becomes the 2 nd consideration to be made when planning an exit.

When your business transfers to a new owner, it is common for the payments to be made over a contractually defined number of years. Now, some owners will only settle for ‘cash at the closing’ with their transaction. That is a reasonable position to take, however, it will eliminate parties to sell the business to such as family, managers, or even to an Employee Stock Ownership Plan – all of which may need to make payments over some period of time. Understanding the timing of the cash flows you will receive is the 3 rd consideration to be made when establishing an exit plan.

You now need to understand the implications of taxation and transaction costs on your transaction proceeds to determine how much you will net. There is a saying in exit planning: it’s not what you get – but what you keep – that matters. Calculating what will be the net amount of your transaction is the 4 th consideration to make when building an exit plan and will bring you one step closer to knowing whether you can truly afford to exit your business.

Finally, a future cash flow analysis is the 5 th step in determining if you can afford to exit your business. An estimated return on investment is applied to your net transaction proceeds and is coupled with all other sources of future income – consisting of real estate income, continued salary, retirement account distributions, pension incomes, social security payments, and any other income producing assets – to measure whether you have enough to make up your value gap and meet your future financial goals.