Thought Leadership on Exit Planning presented by Stony Hill Business Brokers.
As with many things we own, a business has value to the current owner and possibly to a future owner. But what is that value? One way to measure it is to compare your business to other businesses that have been sold. This method is typically known as the “Market Value.”
There are many other ways to value a business in accounting terms, such as using the discounted cash flow of future earnings to value a business as a financial investment. This mathematical method has many assumptions, not including how desirable a business is to a potential acquirer. One of the truest economic rules is that the value of anything is what someone else will pay for it. Knowing the market conditions and having data about actual transactions representing the sale of similar businesses is very important in determining the value of a business.
Why is it important to know the value of your business? First, it is a fact that you will eventually exit your business. Second, in reality, no one knows when that will be. We all wish to have good health and live forever, but that is not likely. As a business owner, if we stop and think about this inevitability, it would be nice to know what the business is worth today.
Knowing today’s market value allows a business owner to gauge the value gap with respect to the exit value. The current market value establishes a starting point for an exit strategy to be created. If the business is currently worth what you believe you want or need for retirement, the exit strategy is relatively straightforward. It will be primarily a strategy of maintaining the value.
However, if the current market value is not what you want or need, the exit strategy must focus on things that will improve the value. Most of these things are risk related. The exit value, as mentioned above, will be what the next owner will be willing to pay. One factor you can’t entirely control is the market conditions. With so many baby boomers retiring and selling their business at some point in the near future, you end up with a buyer’s market. Anticipating this possible tsunami, it is imperative that a business owner begin now to reduce the risks for the next owner.
The exit strategy and exit plan must begin to identify and mitigate these risks. Many business owners try to consider the risks they have in managing their business day to day. These are not always the same risks a new owner may perceive. An Exit Planning Advisor can help identify the buyer’s perceived risk, based on having experience with previous sales transactions. For example, a business owner may be very comfortable with the management team because they have been with him for many years. A new owner may view this same management team as a risk because they may also be nearing retirement age or they are just too closely aligned with the current owner and may leave for other reasons.
The key takeaway from this article is this: without a market valuation, the ultimate exit value is purely a shot in the dark. It could exceed expectations or, more likely, fall short. To have any opportunity to plan a successful exit, it is very important to have a starting valuation that can be used to build additional value. Engage an Exit Planning Advisor to help with the exit plan. It will be worth the investment.