Can you afford to sell your business? Reality versus Wishful Thinking

By Nick Carbone

Business owners dream of selling their businesses for top dollar. But, in reality, many have no idea what their business is worth or if they can even afford to sell their business. Today, we’re going to walk-through an example that will get you thinking and keep your exit expectations firmly grounded.

When talking with other business owners about business value and exit strategies to monetize that value, the discussion always focuses on what the business is worth. Certainly, one should have a ballpark figure to begin with, but that number invariably leads to more questions, such as:

• How can I get that value?
• How can I increase that value?
• What are the risks I won’t get that value?
• How much of that value will I keep after tax?
• Will that value be enough to live the life I want to live after I exit my business?

And it’s that last question that should be answered first.

Let’s work with some simple numbers. Ignoring that there can be significant adjustments to cash flow to arrive at business value, we’ll assume a business is cash flowing at $1 million per year to the owners. For simplicity sake, let’s apply a multiple of five times cash flow, equating to a value of $5 million for the business. A sale would likely be an asset sale (some proceeds may be taxed at an ordinary income rate of 37% for 2018) instead of a stock in the real world, but let’s assume best case scenario that this value will be taxed at capital gains rate (20% for 2018). That leaves $4 million in proceeds.

But is it enough?

It depends on what other portfolio assets the owner(s) has, like real estate, 401K or other retirement funds, stocks and bonds. It also depends on what debt is owed on real estate or other assets, along with the living expenses and discretionary amounts to enjoy “life after the sale.”

Can you fund your desired lifestyle?

To simplify the example, we’re going to assume the proceeds from the sale are the only assets that we have to fund the lifestyle. We’re also assuming that these proceeds are invested in a portfolio that is income-focused, such that it provides for dividend and interest income on an annual basis. Let’s say that portfolio provides a 5% annual return. In our example, that would provide for annual pretax income of $200,000. When you compare that to the annual pretax income from the business of $1 million, this represents a significant pay cut. So, unless you own a business that can command a multiple of 20 times cash flow ($1 million divided by 5%), you will be taking a pay cut when you sell your company.

What can you do? Assuming taxes and investment returns are not going to change significantly, then the only meaningful strategies that remain are to increase the value of the business and reduce the burden that living expenses and discretionary spending have on the need for income.

Focus on your long-term strategies

Establishing a sound long term exit strategy that includes a focus on measuring and growing the value can go a long way to reaching the magic number. It also follows that strategies to utilize the current cash flow from the business to the owner in hopes of reducing debt and building personal wealth will go toward the goal of reducing living expenses and increasing the asset portfolio independent of the proceeds from the sale of the business.

As with most things, to be successful requires awareness, knowledge and careful planning.

And that starts with answering the question: Can you afford to sell your business?

CFO Strategic Partners is here to help you sort through these critical questions. Over the years, our team has assisted dozens of medium- and large-sized businesses with successful exit strategies. You only get one chance to sell your business correctly, so as you plan to leave the C-suite of your business, talk with us on how we can help enrich your life.