One of the first steps you will take when you are considering your exit plan is to determine if you can afford to sell the business and end up with enough money to fund your retirement. This will be the result of the purchase price minus any debt, minus other obligations (phantom stock plans or accrued vacation for employees, for example), minus the advisor’s fees, minus the working capital, minus the taxes. To do this you will need to
Get a realistic market valuation for the business along with the net-after-tax result.
Please note that the market valuation for your business at this point in our process would be based on an estimate of what your business might realistically be sold for in the open market. You could have a professional appraiser prepare a valuation, but that result might not be accurate either, since an actual price would be set by a buyer and the seller. There are no guarantees that any valuation you get would turn out to be the price but if you are selling to a third party, your advisor will try to give you a realistic valuation. To move forward, you will need to provide information sufficient to prepare a valuation of the business. At a minimum, this would include three years of financial statements and tax returns, along with other high-level information. (See typical Info Request Form).
To shine a light into that well, here are a few other points about valuation:
- Valuation of businesses is a complex subject and involves federal and state regulations.
- Unlike public companies, there is no one value for a particular privately held company.
- The purpose of the valuation will affect the way the company is valued.
- Valuation for a divorce, for an ESOP, or for a synergistic buyer may all be different for the same company.
- At this stage in a buyer’s process, the market value range is calculated for a synergistic buyer based on what buyers are currently paying.
- Since it’s not the price, but what you keep after taxes that matters, we recommend that our clients review the net-after-tax result to understand how the purchase price is applied to various categories and how taxes would be estimated.
- If the decision is GO, proceed to the next phase of preparing marketing materials to present the seller to buyers.
Some companies will determine (hopefully BEFORE they engage a business advisor and present the company for sale on the open market) that the net after-tax result will not be sufficient to achieve their goals. If that is the case, this valuation process will be a good starting point for developing a performance plan to increase company profitability. That may take two or more years, but KPIs can be set and tracked with market value checks along the way. Harvesters have been working with landscaping companies for decades to optimize their results.
As you consider the value of your company, please be aware that if you are considering an internal transfer to family or management, an ESOP, or a sale to an outside party, the valuation method will have a different result. We believe it is in your best interest to understand the tradeoffs before making your decision and we are ready to help you gather that information.
If you’d like to discuss your exit options, how to get started, how to get ready, or anything else related to the topic, please feel free to call or email me.
I can be reached at 224-688-8838 and [email protected]
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