You might think that among people the most diligent in personal financial planning you would find the majority of business owners. But you would think wrong. Why?
Here’s the reason: Some 90%s of business owners expect that the sale of their business will one day fund their retirement. Yet less than 5% know how much their business is worth. Those whom we might think are the experts at financial analysis, forecasting, planning for contingencies, etc., are for the most part flying blind about their and their families’ own financial futures.
Couple this with another dismal statistic—no more than 20% to 30% of businesses that go on the market will EVER sell or sell at a satisfactory price—and most business owners are heading for a financial train wreck. Many are apt to end up like an entrepreneur who recently asked for my help only when it was too late.
After years of owning and building a business which gave him and his family a very affluent living, he received a fraction of what he expected for the sale of that business. Instead of retiring as he and his wife had hoped to, he ended up looking for a job at age 70, and she continued working. Sad, true story.
I have preached exit and succession planning for years, but surprisingly it is often a very hard sell. One reason is that most business owners are not truly entrepreneurs. They are really “shopkeepers,” with little drive to create value and growth beyond a stable, modest income, much like the mom-and-pop corner grocery store owners of decades ago. Planning for a brighter future is to them a bother.
For true entrepreneurs, the idea of someday exiting can raise some unsettling questions. One dynamic company founder told me that the idea of retirement “scares” him. He recently took a year-long sabbatical from running his business (at least he has a successor in place), and during that time, he said, Netflix “became his best friend.” Horrified at what he was turning into, he got back as fast as he could to running the company and continuing to build it.
If you find daunting the idea of creating a retirement vision and feel that exit and succession planning is too overwhelming to face right now, there is an easy way to take the first step. Get a comprehensive valuation of your company.
A set of reliable dollar numbers in front of you regarding your business assets can focus the attention like nothing else. This alone can lead you to decide what you really want your business to be worth when you decide to walk away—or are no longer available due to unforeseeable reasons. If you do nothing more than this, you will be far ahead of most business owners in financial and estate planning.
Additionally, a comprehensive, open market valuation is more than a simplistic calculation of earnings times a ballpark multiple. Your CPA or any business broker can give you that, but it can easily be an understatement or overstatement of its enterprise value, that is, what buyers are likely to pay. A comprehensive valuation provides a guide to where you can focus your best efforts to increase market value.
First, it takes account of your customer base, its loyalty, its level of concentration, the capacity of the company to operate in your absence, plus any intellectual property. Second, it rates your business on more than a dozen Key Performance Indicators (KPIs), such as:
- Return on Equity
- Receivables Over Time
- Inventory Turnover
- Debt to Equity
- Interest Coverage Over Time
- Income to Revenue
- Fixed Assets to Income
On these and many other KPIs, your company’s performance is compared to that of your industry peers. Why is that important?
In most cases, the most likely buyer of your company will be a “strategic” one, that is, come from your same industry. If your performance is below the norm on too many KPIs, your chances of selling plummet. This is the kind of valuation we recommend. Traditionally, such a valuation was a very expensive undertaking but need not be any more.
Mulkern Associates is excited to announce that we are now a licensed provider of this kind of comprehensive valuation through BizEquity. Using tax returns and P&Ls for the past three years, together with other key company factors, and a database of 39,000 companies, BizEquity valuations provide clients with highly specific and reliable comparisons and numbers.
Each 25+ page report includes your Asset Sale Value, Enterprise Value, and Liquidation Value. Purchase of the valuation includes executive coaching to discuss the significance of the report for your strategic and tactical planning and setting of priorities. If you want to go further and undertake thorough exit and succession planning, that is our specialty.
If you are curious to know the value of what is likely your most valuable asset, or would like to see a sample report cost-free, give us a call at 818 249 0147. No high pressure, no kidding.