Are you a business owner who expects to fund your retirement by selling your company?
If so, you are not alone. Most owners who are selling their businesses believe they will make enough money to provide all or most of their retirement. But, that belief is seldom based in reality. Nearly all owners overvalue their companies, and are shocked when offered much less than they think they are worth or nothing.
There are many reasons why your business may not be worth what you think it is; here are 3 of them.
There is nothing to sell
What do you actually have to sell?
People want to buy a financial asset, not a job. They buy growth opportunities, the ability to enter new or competitive markets and strategic assets. If you have only created a job for yourself – not a business – very few people will want to buy it.
What can you give a monetary value to – building, equipment, contracts, books of business, customer database, furniture, etc? How much unwritten knowledge and intangible assets leave with you (i.e. business plan, strategies, polices, procedures, customer information/contacts, goodwill)? Are you in a growing or declining industry, and have you kept up with its latest advances?
A non-functioning and/or economically burdensome management team
Does your team add or subtract from the worth of the company?
Whether they are running the company personally or are adding it to other business interests, many buyers want a fully functional management team in place. If your organizational chart is too top heavy, too full of nonproductive family members/shareholders, or has an unbalanced supervisor to employee ratio it will reduce or end a buyer’s interest.
Can you prove management’s effectiveness through documented productivity numbers? How many shareholders/family members are there, and are they contributing to or a burden on the bottom line? Who is staying and who is retiring with you – will there be a brain drain? What unique knowledge and skills does each manager/key person have?
Poor financial situation
What do your financials prove about your company’s value?
The unwillingness to manage and understand their financials is the major reason an owner misjudges his company’s value. He bases his idea on guesses and hopes rather than hard numbers. Your business is only worth what a buyer will pay for it, and they are usually looking for sustainable cash flow and profit. The typical buyer is not looking for a fixer upper with potential.
Which customers contribute to or subtract from profit and cash flow? What are your margins and how do they compare to industry standards? Where are the profit centers? How much are you skimming and how are you going to show the company is worth more than the financials say? Is the business paying for personnel items, and are they showing up on the operating statement?
The time to start the process of selling your business is 3 – 5 years before you put it on the market. You need time to make it attractive to buyers – putting it on the market is at the end of the process, not the beginning. You have worked too long and hard to leave funding your retirement to chance; do not slow down and stumble at the finish line.
At Cogent Analytics, we never stop looking for ways to improve your business and neither should you. So, check out some of our other posts for helpful business information: