By Josh Patrick
NEW YORK (AdviceIQ) -- You might know the worth of your business, but odds are you don't. Determining your business's value can be tricky -- and potentially critical to your quality of life in retirement.
Here are factors and formulas to consider.
Owner's benefit. The easy way to figure your business' worth uses a multiple of cash flow. Average your past three years' owner's benefit and multiply by a number between three and six.
The hard part: figuring out owner's benefit in the first place, the profit that the business creates plus its non-cash expenses, excess cash you pay yourself. In some cases, your business is worth more or less than the multiple of owner's benefit (sometimes also called seller's discretionary income).
Several values at the same time. The real value of your business, of course, depends on the buyer, as well as why and how much that buyer wants your company.
If your prospective buyer wants your business for investment purposes, your multiple is lower. Persuading a buyer to own your business for its strategic or intellectual capital value raises your multiple.
Also think about who the next owner is. If that person comes from your family or from among your current managers, look for a lower value. If the prospective owner comes from outside, you can look for a higher value.
If you don't find a buyer, face that squarely and confront a liquidation value for your company.
Be realistic. If you're like most owners, you need the value of your business to fund at least part of your retirement. Wax too optimistic about the worth of your business and you can make faulty, maybe disastrous, assumptions about how much in other savings you need for later years.
Play it safe. Use lower values rather than higher for your company and its sale. Plan for the worst and hope for the best.
Put yourself in a potential buyer's shoes. Buyers must figure out how to pay for your business and where that money can come from. Do the same: Look at your business as if you want to buy it. If you think your business is worth X, ask yourself -- honestly -- if you are willing to pay that price.
Once you reach putting pen to paper, head off all surprises. The Small Business Administration recommends that your final sales agreement contain all terms of the purchase. (An attorney's review is also wise.)
This agreement defines everything bought in the business, including assets, customer lists, intellectual property and good will. Other items to address in the agreement: a non-compete covenant; any future adjustments you or the buyer want; payment terms; inventory included in the sale; access to any business information; operational management of the business before closing; all parties' fees; and the date of closing.
Don't corrode your own benefit from the sale with careless mistakes or potential misunderstandings.
Knowing your business' worth fits into a good financial plan. Most business owners won't get enough from selling a business to completely fund retirement. Still, your business likely ranks as your most valuable asset; knowing its worth helps you decide how much more you need to save so you can afford to retire.
Scenario planning helps: Take different values and see how each outcome and possible sale price affects your retirement.
You spent years building your business. Sell it carefully and get all you can for your own future.-- By Josh Patrick, CFP, founding principal of Stage 2 Planning Partners in South Burlington, Vt. He contributes to the New York Times' "You're the Boss" blog and works with owners of privately held businesses helping them create business and personal value. You can learn more about his objective review process at his website.
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