While it may seem like it now, you won’t be running your business for all eternity. At some point, you’ll likely retire from or sell your company. To that end, you’ll need an exit strategy. When clients come to us without clear exit strategies, we often find that the hardest component for them to master is valuing what their businesses are really worth. Too often, the true value of the business is grossly miscalculated, considered too late, or both.
Mistake 1: Not Understanding Your Own Worth
It’s a classic mistake: As a business owner, you likely don’t know what you’re worth to your business. Business owners often wear many different hats, which can drastically alter what it would take for a third-party investor to replace them. The truth is that while you don’t necessarily compensate yourself for all the “little things” you do in the business, someone else may need to be compensated. And, in many cases, it takes more than one person to replace all that you do. Properly valuing your business means assigning a cost not just to the figurative role you play, but to each of the hats you wear. It may turn out, for example, that you’re really doing the work of several different people, from CEO to operations manager to human resources to accountant. And while you were able to juggle it all, the person acquiring your business may need to deduct from his or her offer in order to account for the expense of hiring multiple people to do “your” job. It may seem trivial but the buyer needs a realistic return on investment, which could result in a much lower offer than you would expect.
Mistake 2: Not Planning Early Enough
Starting a business with an exit strategy in mind is a great idea. We recommend giving yourself at least 5 to 10 years to prepare your business for a sale. Why so long? It will give you time to make changes that may enhance your business value. For instance, ask yourself:
- Is your business growing or is it stagnant? While a comfortably small business may have been your sweet spot, you may find that growing the business might increase its value exponentially when sold.
- Does it carry too much liability? Take an honest look at your assets and personnel from the perspective of a buyer. Especially in a family business, decisions are made more from a personal or emotional perspective than a business perspective. These decisions can carry huge risks for a buyer.
- Is the business structured in the most advantageous way? Take a look at our previous post on structuring a business for capital gains for one example of how the business structure can affect business value.
Remember that these tips are not legal advice and that they should not replace a consultation with a tax or business advisor. Take a good look at your own exit strategy and, if you fear that it may be lacking, act sooner rather than later to, 1) find out the true value of your business and 2) increase that value before it’s time to move on.
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