Business Valuation Sandy UT
Selling Your Business to Pay for Retirement
Many small business owners get so immersed in day-to-day operations that they don’t take the time to consider long-range plans, such as retirement. But even for those who are able to work a good, long time – avoiding the misfortunes of health issues, financial emergencies and business setbacks – retirement tends to sneak up on you. Business Valuation Sandy UT
However, the day will come when you realize that you can’t work forever, and at some point the business you’ve labored to build will need to work for you. Don’t let that moment come so late that you haven’t prepared your enterprise to procure the highest price possible.
You might think you have retirement covered. Once you’re ready, you’ll just sell the business and retire on the proceeds. But that plan can have flaws. For example, what if when you want to retire, the economy is in a downturn and there are few prospective buyers?
What if you have to sell before you previously intended due to a health concern or family emergency? If we have learned anything during the past decade, it’s to plan for contingencies.
Do you have a plan to aggressively pay off your mortgage and other obligations so you can retire debt free? Do you have insurance to protect both your business and family should something happen to you? It’s important to start strategizing ahead of time so that, regardless of whether all goes to plan or not, you have options when the time comes to retire. A big part of this equation is to understand the value of your business as it relates to retirement planning.
Because a small business is often built on blood, sweat, experience and long hours, it can be difficult to step away and view it as an asset. To create a retirement plan, it’s important that you recognize this and consider how much that asset is worth. To get started, hire a third party appraiser or broker to value your business from an objective market perspective. Bear in mind that there are three methods typically used to assess the value of a business:
- Asset approach – Add up all of the assets and subtract their depreciation to determine value.
- Income approach – Calculate the net present value of the income generated by your business by discounting future cash flows and applying multipliers to EBIDA (Earnings Before Interest, Depreciation and Amortization).
- Market approach – Compare your business to others in your industry, paying careful attention to similar size and location, and factor in intangible variables such cash flow, market opportunity, economic conditions, customer loyalty, team experience, etc.
You might wish to value your business using all three approaches and then establish a price based on the one with the most favorable valuation. Recognize, too, that the value of a small business is frequently influenced by less tangible assets – such as the expertise of a key employee – so it’s not always effective to use a simple mathematic formula.
It’s also a good idea to plan two exit strategies. For example, Plan A might be to sell for a generous profit, while Plan B is to retain equity in the business but hand it over to someone else to run if you don’t get an offer for the price you want. Consider your future market and the ideal buyer, and manage your business so that it will be an attractive turnkey for that target when you’re ready to sell. Or, think about grooming a younger employee or one of your children to take over the business when you retire. Perhaps selling isn’t your best option – if you remain invested in the business it could generate passive income to supplement your nest egg.
There’s your business plan, and your retirement plan … now is the time to think about how to integrate the two.
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