Continuing from our last post about withdrawal rates from an owner’s post-exit investment portfolio, let’s look at the fourth question that business owners need to answer on their way to a successful exit.
Question 4. What is your business worth?
“The current value of my company is $________.”
Common Assumptions: Most owners base their estimates of their businesses’ value on prices they’ve heard quoted for similar businesses. Additionally, owners tend to overvalue their business, which prevents them from growing value and often leads to a rocky exit at best. Building business value often takes years, so it’s important for owners to understand what their businesses are worth currently to avoid any surprises when they are ready to exit.
All We Want Are the Facts: Owners must base their estimates of business value on the estimate of a well-experienced valuation expert. While estimates don’t quite rise to the level of fact, they are far more reliable than owners’ guesses, which are often based on what they have heard about valuation multiples in their industries.
In the initial stages of planning their exits, business owners should utilize a business appraiser to provide a “calculation of value” for Exit Planning purposes. These cost a fraction of a full opinion of value, which business owners will need when they actually transfer ownership.
Sources of Accurate Information: There are two sources of information to use, based on the projected type of transfer of the business.
- If the business owner plans to sell to a third party, an investment banker or business broker will be able to help. Investment bankers and business brokers will typically provide owners with a range of likely sale prices. Investment bankers normally do not charge for providing a range because they want the owner’s business and hope to represent the owner in the future. Business brokers often do charge to provide this service, although at a relatively low cost.
- If the business owner plans to transfer the business to children, management, or co-owners, a business appraiser will be the best source of information.
There are only two more questions to answer with facts before business owners have what they need to develop a successful exit plan. Next up is Question 5: At what rate do you expect your cash flow and business value to grow?