Life After the Business Sells… Mentally Preparing for Retirement – Post #18February 1, 2018
Can Streamlining A Business Hurt its Eventual Sell-Ability?February 14, 2018
At this point in our Building a Business to Sell series, you’ve got to prepare yourself to receive an actual offer. Quantify your company’s value and determine the minimum business sales price you need before a buyer quantifies value for you. Getting to the business sales table and realizing the buyer’s offer will not sustain you and your family in the next stage of life will leave you between a rock and a hard place. If you’ve put in years of exit planning to get to this point in your business’s life, now is not the time to become haphazard with your business goals.
Podcast Time Index for “Know Your Business’s Minimum Sale Price”
- 00:32 – The Assessment
- 00:38 – Iron Man
- 05:00 – Take an assessment of where you’re at
- 06:24 – Personal Assessment
- 08:09 – Cost of Capital
- 09:23 – Personal Tax Planning
- 10:07 – Risk Management
- 10:42 – Investment Management
- 12:13 – Distribution Planning
- 12:40 – Consult with a CFP
- 13:11 – What is the Value of your Business?
- 16:48 – How much do you really need?
- 17:11 – Mind the Value Gap
- 19:10 – Is your Business Prepared?
On Your Mark, (Don’t) Get Set
In 2017, I participated in a Half IRONMAN triathlon. For those of you who aren’t familiar with a triathlon, athletes swim, bike, and run long distances back-to-back. Depending on the race, this half distance I was racing typically requires a 1.2 mile swim, a 56 mile cycle, and a 13.1 mile run. Because I try to do one or two of these races a year, I can tell you that they can be absolutely exhausting.
In January, I signed up for one that would take place in my hometown of Kingston, Tennessee. I paid for the event, and I began training. However, about 60 days before the race, I was at my doctor’s, and he told me not to exercise for the following four to six weeks! No way, Doc! How in the world was I supposed to do that? I had financially committed to this race, and I had been training for it for months. My doctor was persistent though and told me that jeopardizing my health was not worth the risk of exercising for that time.
So I didn’t. I didn’t train. I didn’t ride a bike or swim or run. It was “fun.” For those of you who have done any type of sports, you know that a couple of weeks prior to the race, your conditioning should be at its peak. You have to be exercising, but I couldn’t. However, I still decided to run the race. I committed to it. I had paid for it, and many friends, clients, business team members, and family members were going to be there watching or participating themselves. And guess what? Those participating had been exercising, but not yours truly.
When race day arrived, I show up committed. Swimming is my thing, so I wasn’t worried about the swim at the beginning. The bicycling? I’m pretty confident about the bike section, but man I do hate running! Lord, help me if I can get through the run. It’s like eating an elephant one bite at a time.
The signal was given and off I went! The first leg, I hit the water and knocked that part out. I ran to the transition area to put on my biking shoes and helmet, and off I pedaled. I was doing well. Around mile 46 into a 56-mile bike ride, I hit the wall. Holy Batman! There were parts of my body hurting, not just aching, because I hadn’t been able to condition myself. I even experienced the worst cramp in my hamstring I’ve ever felt before. But I pushed through it and transitioned to the run.
13.1 miles. Yeah. Here we go.
But Wait! There’s Pizza
Did I tell you this particular foot race was a looped one that was set up in two, six-mile loops? Well, as I turned into mile six, I was feeling pretty bad. Just about that time, my business partner who had been behind me, passed me and yelled, “Look Dude! They’ve got pizza at the finish line!”
Now, if you’ve listened to the introduction to my Podcasts, you know that I LOVE pizza. If I could eat pizza every day of the week, I would be in heaven. All someone has to do is say the word “pizza,” and my mind loses motivation to do everything else. At this point in my race, too, I was completely exhausted.
So what did I do? I exited “Stage Left.” I walked straight through the finish line at mile 6. Everyone was cheering me on, and I got a big medal… but all I cared about was eating pizza.
After I finally ate my pizza, I went to the race officials and fessed up. “Guys, I’m sorry. I didn’t do the two full loops on the run. I smelled pizza.” Thankfully, everyone laughed. But truth be told, I’m not sure I could have finished that race.
Preparing for the Sale of Your Business
So, what do cramps and pizza have to do with selling your business? Just like a triathlon, you can’t go into the sale of your business unprepared. Heaven forbid you find yourself in the middle of a business sale and realize you’re not in shape for that “event”. Having the mental fortitude, the financial fortitude, and the emotional fortitude to get through this sales process will be vital to finishing the sale.
So before we jump into the sales commitments and purchase agreements or the sales team and the expenses, I want you to stop. Let’s do a personal and business assessment to determine the minimum business sales price you need before the buyer puts his own price tag on it.
The Personal Assessment
In the previous post, we discussed life after the sale. You should have answered the question, “What are you going to do after you sell your business?”. Whatever your answer was, have you quantified it?
“If your personal goal is to retire at the age of 50 so that you can sit back and enjoy life, can you afford to do that?” – Justin GoodbreadClick to tweet
Let me say this way. If your personal goal is to retire at the age of 50, can you afford to do that? Kudos to you if you can. However, do you know how much money, or income, you will need every year in order to reach your retirement goals? Do you know where you will live or what kind of vehicle you will drive? Would you like to cook your meals at home or eat every meal in fine restaurants? How will you obtain and pay for health insurance and medical expenses that arise? Would you like to sell this business and start another one? Your answers to these questions will tell you what dollar amount you need from the sale of your business to live the lifestyle you want after retiring.
The answers to those questions also determine the type of quantifiable personal assessments you should do at this point in the business sales process. So I ask you to stop, pause, and look at your person. Then, ask yourself the following personal planning questions before the business sale:
1. How will your cash flow be affected?
One of the most popular and problematic things I see in selling a business is that business owners don’t understand the cost of capital. For example, a friend of mine was preparing to sell a business that produced about 12 million dollars a year in revenue, and he didn’t have many Costs of Goods Sold, or COGS, inside the business. After analysis, we determined that he was running a 15-17% income rate on this business. In other words, he was taking home about $1.8 million (15% of $12,000,000). However, if he sold the company for a minimum sales price of 18 million dollars, the proceeds would only generate about $900,000 per year in take-home income. ($18,000,000 x 5% = $900,000)
So you have to look at your pre-sale and post-sale cash flow scenarios after the business sale. Will your income be enough for you to live the life you want to live, whatever kind of life that is?
2. Will a sale affect your personal tax planning?
If you receive a “nice check” that supersedes the minimum sales price you expected from the sale of your business, what will your personal tax repercussions be going forward? Do you need to stop now and make some adjustments to the way you’ve positioned your assets in order to minimize future tax liabilities?
You see, right now, if you need additional capital, you just work harder or create more. That’s what we entrepreneurs tend to do. But what happens when you go from this entrepreneur phase to a retirement phase? How will you generate additional cash flow to offset whatever tax demands the government requires of you?
3. Are your risks managed?
While your business required multiple types of insurance and legal documents, what types of insurance and liability coverage will you need now? Do you really need life insurance anymore? Will you need long-term care insurance, disability insurance, or health insurance upon retirement? You should assess your current insurances and legal requirements as a business owner and determine which ones you will need after the business sale.
4. How will you manage your investments?
Similar to tax planning, you will need to quantify your liquid and fixed assets and then plan what to do with them. When most businesses sell, owners typically deal with non-qualified assets or monies in accounts that don’t qualify for IRS benefits. In juxtaposition, qualified assets are most commonly your 401K’s or your IRA’s. Those accounts are qualified specifically for retirement and receive tax-free or tax benefits accordingly.
Well, whenever you sell your business, you are most likely dealing with taxable accounts. For most business owners, investment management is not managing stocks and bonds. In my years as a CFP®, or CERTIFIED FINANCIAL PLANNER™, I’ve found that most entrepreneurs are strategists. Instead of worrying about stocks and bonds, the owners I’ve worked with prefer to position their money where it will grow in the most tax-efficient way possible. Therefore, you need to look at your investment management process. Try to find a way to minimize your taxes and taxable income should you sell your company.
Now is the time a CFP® can help you determine the minimum business sales price you need for you to have enough money on which to live after the sale of your company.
The Business Assessment
You see, the goal for most of us owners is to grow the business to where it’s just a part of our overall net worth, not 80% of it. That leads us to the second type of examination we need to do at this point in time, the business valuation assessment. Before you list your business for sale, your CFP® will ask you, “What is the value of your business?”.
Many times at this business phase, I see entrepreneurs grossing 500k, 1, 5, 10, 15, 20, or even 40 million dollars a year in revenue. Or, like many of my clients, they are bringing in hundreds of thousands of dollars. If you’re like one particular friend of mine, you may be grossing $300,000 a year. While that may not seem substantial, it does when you know that his profit margin is 90%!
For many business owners, the goal is to grow your company in order to enjoy more income. However, before you know it, you’re producing millions of dollars in revenue a year, but the value of your net worth IS your business. Most of your net worth is tied up in a fixed asset, or one that cannot be converted into cash easily.
Do a Rough Estimate of Business Value
So this is where business value comes back into play. At this point in your business life cycle, you will need to have a rough estimate of the value of your company. Now, I’ve created a whole post about business valuations and how businesses are valued. My experience as a Certified Exit Planning Advisor® and as a value growth expert has led me to draw up detailed assessments of current business values based on EBITDA and industry-specific value multipliers.
EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. So if you have a business that is worth five times EBITDA, or 200% of collections, or three times recurring revenue, all of those things are good guidelines to follow to get you close to what you think your business is worth. At this point, I’m not talking about the nitty-gritty of value calculations. I’m just talking about getting together a very rough business value estimate, or assessment.
Determine the Minimum Business Sales Price You Need
After you evaluate and quantify your personal and business assets, you will need to determine whether or not you have enough money on which to live after you sell your company.
If you tell me that your current value is two million dollars, I’ll ask, “How much do you need to reach your goals?” If you tell me you need five million dollars to reach your goals, I’ll ask what other assets you have. If your business is the majority of that two million dollar asset, you may be in trouble.
Likewise, if you have seven million dollars of hunting property that you are unwilling to sell, you cannot use that in your future income calculations. You will only have expenses associated with that asset. Therefore, you will have to look at cash on hand and other liquid assets to determine your current financial worth.
Fill in the Gap
“Value Gap – The difference between the appraised value of your company and the minimum sales price you need to meet your life goals.” – Justin GoodbreadClick to tweet
After running personal and business assessments, you may find that there is a Value Gap. In other words, there is a difference between the appraised value of your company and the minimum sales price you actually need to meet your life goals.
That value gap can occur at many different business and personal levels, so it’s time to find it. Now is the time to look for value gaps – before you put your business on the market. Right now, before a buyer offers to buy your company, it is the time to determine your minimum business sales price.
Why Does This Matter?
I bring all of this information to you now because the last thing you want is to embark on this metaphorical IRONMAN race of selling your business unprepared. You don’t want to find yourself in the final stages of your run and realize that the buyer’s offer will not meet your needs.
Unlike my IRONMAN race where I could just walk out and grab a piece of pizza, you cannot walk out of a business sale without losing hundreds of thousands or millions of dollars that are on the table. If you go into the business sales process without knowing what your business is worth and the minimum sales price you need to provide for your personal expenses, you may have to walk away. Walking away could damage your overall personal and business worth significantly.
Additionally, if you walk away in the middle of a sale, you can harm your potential buyer base. If the sale doesn’t go through, your next potential buyers may end up giving you a low-ball offer.
So friends, don’t jump into a sale lackadaisically. This is not a time for a haphazard or halfhearted approach. While I can laugh about my IRONMAN failure, you can’t laugh about a disrupted business sale.
Before you go any further into the details of the business sale, you need to make sure you’re ready. Meet with your CFP and your CPA to do a personal and business assessment. Will you be okay if this business sale comes to fruition?
Now is the time to make sure that your personal and business life can come together to meet your needs so that you can fill in any known gaps. Figure out the minimum business sales price you need before your buyer does. If you need help, reach out to me. I’ll be more than happy to help you if you need guidance.
In our next article, we will be working on the sales contract, with the help of a good attorney.
As always, if you need clarity about anything in this article or need help determining your business’s true value, reach out to us.