This is not about the end of my blog or anything like that. What I want to write about here is that at some point you and your company will part ways. Either you will sell it, close it, or die while still running it.
For most small business owners, their business represents a tremendous investment of their time and money. If they were not running their business, they could be employed by someone else and earning a living that way. They could invest their dollars in other ways and potentially make good money doing that as well.
What this means is that everyone should be looking at the amount their business will generate for them at a Sale, if any at all. This could mean the difference between retiring normally and working until the time that you pass.
This will be a series about how to create a business valuation that meets your needs. If you are unclear of what you need from your business to retire, then visit a Financial Advisor. Most of them will do a free retirement plan. Just like any type of retirement planning, the sooner you think about a transaction the more likely that you will get out of it what you want.
Once you have that number that you need from the business, it is time to work on your valuation. For most small businesses, this is a multiple of the cash flow from the business plus net assets. To be clear, cash flow is the Net Profit from your business adjusted for any Capital Expenses. Since a number of the deals that I look at are in the Internet Service Provider space, Capital Expenses can be considerable. If that is not significant in your business, then it is just Net Profit. Assets would include any bank accounts, receivables, payables, fixed assets, inventory, and intangible assets that a business might have.
Both of these portions of the business are a bit more negotiable than one might think. It requires some accounting and some thought on how to get to an effective valuation on both fronts. For Net Profit, it turns out that many small business owners run some household expenses through the business. This needs to be changed in order to arrive at the right amount of Net Profit. There may be other factors that are added back (like underpayment of the owner as CEO). For Assets, both Fixed and Intangible Assets are more difficult to quantify. Intangible Assets are hard to quantify (What are your digital assets worth?). Even Fixed Assets can be tough. Do we look at the depreciated value or the replacement value?
All of that should be thought out before you want to sell your company. Have a great day!
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