Are you considering selling your business? If so, you likely have many questions, and among the most common is: How much is my company worth?
The answer may surprise you.
A study conducted by MassMutual uncovered that the average owner overvalued their business by 59%. And if you’re like most entrepreneurs, the value of your company represents roughly 70%-80% of your personal worth. If this average holds true for you and you estimate your company’s worth at $20 million and it’s actually worth roughly half ($8.2 million versus $20 million on a pretax value basis), that means you’ll run out of money 59% faster than you currently predict.
When selling a company, 80% of sellers miss one of the following five crucial elements, which can lead to lower satisfaction with the sale of your company, or even worse — a failed deal. Check out these five actions if you’re considering selling your company in 2022.
1. Understand the true value of your business
A business owner often hears anecdotal stories about the value of other companies and, based on that information, draws conclusions about the worth of their own company. In comparison, if you’re selling your home, you wouldn’t select a sales price based on anecdotal stories about values in your area. You would get a professional valuation of your home. And based on that information, you might decide to make strategic improvements to get a higher price.
Consider meeting with an investment banker and getting a “real” valuation of what your business is worth in today’s market and an opinion about whether it is sellable. Equally important, a banker can share the likely terms of a deal, which are often more important than the top-line sale price in many ways.
2. Determine the potential after-tax proceeds
Understanding your valuation and getting strategic advice on how to improve it are the first steps to getting ready to sell your business. But it’s also critical to partner with your CPA to understand the full financial picture, including after-tax proceeds.
A CPA can assist with determining the tax on the sale given a few different scenarios, including a stock sale, a stock + tax election (if applicable) or an asset sale to deliver the net after-tax numbers. Again, your investment banker can expertly comment on likely structure: all cash, earnout, seller note, or others, given the current market and industry dynamics.
3. Get clear about how much is enough to meet your goals
After you sell your business, what does the next stage of your life look like? This isn’t always an easy question to answer, which is why meeting with your wealth manager or financial advisor is a good first step.
During the meeting, you can discuss the goals for your company’s sale and how much you need to maintain your existing lifestyle, or whether you need additional resources to pursue new business ventures. This forward plan is often called a Monte Carlo exercise and is vital to understanding and peace of mind.
4. Find out whether you’re really ready to exit your company
Now that you’ve partnered with your financial advisor and figured out how much money you need to meet the next stage of your life, it’s time to figure out whether you’re truly ready to exit your business.
Imagine that you have the sales and purchase agreement in hand. How do you feel? Addressing the emotional impacts of the sale late in the process isn’t ideal, which is why before the sale is the perfect time to determine how you’ll feel at the finish line.
Reflect on the hardest four-letter word, which is “what.” This exercise requires you to wrestle with your current self versus your future self.
- What do I want next, and what compelling future am I headed toward?
- What if my identity is wrapped up in my business?
- What would I do if I didn’t spend 40 to 60 hours a week on my business?
- What if I have not turned over the reins sufficiently to my second in command or management team?
- What if my spouse doesn’t want me to hang around the house?
- What if my friends are still working?
- What if I’m not cut out for retirement just yet?
Know thyself and spend a reasonable time of introspection (versus reacting to a preemptive phone call or waking up grumpy one day and saying “I need to sell”).
5. Review gaps in your business and personal plans
Partner with your investment banker and thoroughly review any gaps in your business and personal plan and identify potential deal killers or deal challenges. A few of the most common deal killers include:
1. Seller expectations. Value is calculated based on a multiple of your financial results and adjusted by your impact on the business as an owner. Then it’s discounted by the likelihood that any of your financial results won’t continue and increased by whatever projected growth is creditably on the horizon. A solution to ensure that your expectations don’t kill the deal is to work with an expert who will value your of your company and determine which factors are most critical to increasing that value.
2. Buyer chemistry. Many founders mistakenly believe that the “right buyer” is one that offers the highest price. However, founders often care deeply about what happens to their people and the company culture. As a result, the sale is about much more than money; it’s also about chemistry. With the right advisors and a solid sales process, there is typically more than one ideal buyer. Take advantage of your advisor’s guidance and experience and check with your instincts to find the best fit.
3. Poor preparation. An advisor can help you focus on the most important aspects of the sale and review all relevant information to ensure that any potential issues are overcome. They’ll also evaluate opportunities for additional growth to entice buyers to pay more than a backward-looking valuation might suggest.
By understanding the most common deal killers, you can be better prepared to avoid a situation where your buyer loses faith or confidence and walks away.
Moving forward with greater confidence
In summary, before selling your company, work to answer these questions:
1. What is my company worth, and what is its current marketability?
2. What is my range of values given various deal structures on a NET-AFTER-TAX basis?
3. Is that enough to meet my goals for retirement or reinvestment into the next chapter of my life?
4. Do I have a compelling plan and am I emotionally ready to sell my company and are my business and personal teams ready and supportive so I can exit without regret?
5. Will there be any challenges or impediments to my reaching my goals, and what is the probability of success?
When you can answer these questions definitively, you can then begin to assess the when and how and to whom you should consider selling your company.
For more information, book a call with a senior professional who can help you determine a path forward.