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Yes,
you can easily get a financial evaluation of what your
business is worth to the general public, to someone who,
perhaps, might be interested in buying it. But that begs
the real question - What is your business really worth
to you? Building a scalable, sellable business is
hard work.
In
fact, while building a business, you devote the one
resource in the world you can never replace - your time.
That's the difference between you, the business
entrepreneur, and a venture capitalist. Luckily, for
venture capitalists money is often replaceable. But time
is truly unique - it is the one thing in life that is
completely and irrevocably irreplaceable. Using your
time to build a business creates an entirely different
perspective of what the value of your business is worth
- to you. And business owners do pour in
the time.
According
to a 2000 study by New York marketing firm Willard &
Shullman, the average small business owner works 52
hours a week. Meanwhile, the U.S. Bureau of Labor
Statistics indicates the average American employee puts
in 34.2 hours per week. We often refer to this dedicated
time as "sweat equity." But I am from the camp
that "sweat equity" doesn't even begin to
properly convey the passion one needs to spend endlessly
long nights, night after night, away from your family,
friends and obligations. All this time and effort for a
business you hope will have a meaningful payout can
create a different perception of worth. Nevertheless,
now that you have "done the time" and are
entertaining thoughts of selling, you should begin
planning for it now.
The
next step? Strictly from a personal sense, have you
thought about what life really looks like without the
business you spent years developing? Do you hope this
business will allow you to retire comfortably, without
having to work another day? Or will you recreate another
business, only this time a bigger, better business, in
something you're more interested in or something you can
afford to be interested in? Perhaps this time you will
follow your passion.
Plan
for it. Once you have an understanding of life after
the business, you should begin the critical process of
planning for it. Through the use of a personal cash flow
and situation analysis (developed for Bentley Co. by Bay
Area Business Solutions) you can evaluate your lifestyle
before you sell. Will you be living the life of luxury
or will you be forced back into the workforce?
 Figure
I Small business owners should consider how
important the value of their business is to their
overall financial health. This pie chart represents a
hypothetical division of personal wealth for a small
business owner. It is not unusual to find that over half
of the wealth a small business owner processes is inside
his business. With proper planning, it can be worth
substantially more.
In
this hypothetical example the business is already
providing the owner with a surplus income so what would
compel him/her to sell? How enticing would the payoff
really have to be? Regardless of where you are in the
process of building your business, running your business
or contemplating selling it - understanding your
personal cash flow is one of the most useful steps you
can make in determining if you are really ready to sell
your business.
The
analysis in Figure
II
(click here)is an example of
income and expense in-flows and out-flows that
calculates the yearly net worth of an individual. This
plan is based on a set of assumptions that is
instrumental in projecting your personal situation and
cash-flow. This will help determine whether selling your
business is the appropriate choice that makes sense for
you.
In
the example described in Figure II, the small business
owner was 50 years old and had reached a point where he
was tired of operating the same business he had run for
the last 25 years. The business had provided a more than
comfortable income, and along with equity appreciation
in his residence and other investments, the CEO was
ready to try something else. This is where personal
financial planning comes in.
Using
a professional appraiser, the business was valued at
$2,000,000. Assuming maximum federal and state capital
gains of 29%, this gave the CEO an after-tax net
business value of $1,420,000 (Column B).
The
model assumes a successful sale, and that the proceeds
were securely invested in municipal securities with an
interest rate at 3.5% annually (C). At the same time,
the personal family cash requirement to live comfortably
was $75,000 a year (F) until the age of 70 (20 years
later) in which time the living needs increase to
$80,000 a year. The model then calculates how income
from the sale of the business (C) and other income (D)
can sustain his income needs (F), with minimal invasion
of principal (H). This demonstrates that the proceeds
can sustain the desired standard of living well past
normal requirements (I).
Understanding
both your business and your personal financial plans are
extremely important elements in your business life.
Wherever you are in the process of planning the exit of
your business, you should begin the retirement planning
process now. It's easy to get started - just click
here.
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