|
The
Importance of Knowing the Value of Your Business
There is a popular analogy that says, “As
Americans we spend more time planning our vacations than
we do planning our retirement.”
Independent business owners are the group
best characterized by this statement. We work more hours,
pay ourselves last and less per hour than those we employ.
In doing so we also contribute the least to, and can expect
the least from, the Social Security program. In most cases,
our only retirement account is the value of our business.
Not knowing the current value of our largest
asset, and the factors that influence its future value,
means that we cannot effectively plan the date or style
of our retirement. Knowledge is power. Without it, we are
truly powerless.
We all believe that one day, when we are too
tired to run our business, we will merely sell…and
retire. We assume the selling process is exactly like selling
our home.
All too late, we find out that selling a business
is absolutely nothing like selling a house. First, it is
a painfully long process. The Small Business Administration
(SBA) states that a sale completed in less than six months
is a quick sale. Further complicating the process is the
fact that the value of a business is far more complicated
and difficult to ascertain. Unlike real estate sales, the
sale of a business is not recorded anywhere. Hence, there
are no published comparables to which to refer. Business
valuators are difficult to find and very expensive to use.
Chances are one will not be listed in the local telephone
book.
Void of any comparable data, personal expertise
in business valuation, and access to a local valuator, the
business seller relies on a shot in the dark approach to
setting his price. If priced too high, it doesn’t
sell. If priced too low, potential buyers either wonder
what’s wrong and walk away, or snap up the “deal
of the year.” In any case, lack of knowledge of the
fair market value results in most businesses either not
selling or selling well below their optimum justified price.
While it is imperative that the fair market
value be known, it is equally important to understand the
justified loan amount. Buying a business most often means
securing a loan, and the justified loan amount comes from
the lender’s review of business tax returns. In most
instances, tax returns are completed with the idea of limiting
tax liability by showing little profit. That strategy is
great for reducing taxes, but is devastating for loan qualification.
Little profit translates into little money for the buyer
to make monthly loan payments.
Consequently, tax accounting inadvertently
causes a typical sale to require a significant amount of
owner financing. Seller financing in and of itself is not
necessarily a horrible thing. But, the fact that as many
as 90% of all new businesses fail in their first year makes
seller-financed sales a very risky proposition. There is
a high probability that in twelve months the seller will
be taking the business back, and in the worst shape it has
ever been.
Many of the over 4 million businesses that
are sold each year are sold with the business owner blindly
naming a price and then agreeing to provide owner financing.
Selling a business for the right amount without owner financing
requires at least two to three years of planning and preparation.
The time spent in doing so is well worth the effort. Properly
preparing a business for market can mean a doubling or tripling
of the fair market value!
For a business owner to control the style,
quality and time of his retirement, he must learn the business’s
fair market value and justified loan amount --- and the
strategies to increase both. Advanced planning for retirement
is not difficult, but without the proper knowledge it is
impossible. While knowledge is power, the lack of it can
result in financial devastation.
Beyond Breakeven Business Strategists are masters
at counseling business owners on strategies to increase
the value of their businesses. Call today 813-977-7071 to
schedule a free, no obligation, “valuation”
of your business. Note: our Business Strategists are merely
that, “Strategists”. We are not brokers and do
not take listings, sell businesses or work for commissions.
|
