or some reason, I’ve been busy helping the owners of our member companies determine the value of their companies. I always ask why they are interested and, most often, it’s because they are between 55 and 65 years old. They’re worn out from fighting low margins in the bid market, tired of employee issues or just simply burnt out.
So, the big question is this: Is your business worth more to you or someone else? Here’s how to figure that out. It starts with your quality of life and your health. If you have your bucket list pretty well checked off and are in great health with no desire to slow down, that’s one key factor. Or, you may have the vast majority of your personal net worth tied up in your business. You may find yourself bumping up against retirement age and you haven’t done a single thing you had hoped to by now. These are two very different ends of the spectrum and different motivations to find a good exit strategy.
1. Your company could be worth more to someone else.
That’s the case when you simply run out of operating capital, financing options, or even the energy and ambition to keep pace with the many changes occurring every day. If you can sell it for a price greater than five years of your income plus bonuses, then it may be worth more to an outside investor. But, finding that buyer rarely happens in our industry.
2. Your company could be worth more to you.
This is the case when the balance sheet and income statements don’t support selling it for more than what you can earn by continuing to work in the business. Right now, you aren’t going to get more than four to five times the average of the last three years’ earnings. A healthy balance sheet improves that number, much like having significant recurring monthly revenue. A weak balance sheet with excessive and outdated inventory and/or questionable receivables lessens that value.
Let’s say your business has averaged $10 million in revenue over the last three years and has earned after-tax profits of 3%. In your mind, you run a $10 million/year business; yet, in the mind of a prospective buyer, you run a business capable of earning $300,000 per year. So, what does an outside investor want to pay to earning the same $300,000 when your leadership, experience and direction are gone? They will place a value on your company based upon the risk they see themselves having to take.
The smart investors look to see what has made you successful and what has held you back. Ironically, it’s usually the owner/principal in both cases. So, they evaluate that and form an offer based upon their beliefs that they can 1) operate more efficiently, 2) perhaps out-market your existing resources, or 3) find your location desirable to their strategy or niche market complimentary, etc.
So, would you sell your $10 million company for a one-time payout of $1.2-$1.5 million? Or, can you make more in annual income plus year-end bonuses over the remainder of your career? In the end, it comes down to that decision almost every time. –CW