OK, you do not know if it is the right time to sell, let alone who to sell to and at what price and terms. Here are the three steps:
- Determine the When to Sell.
Long before it is a need to act, the first step is to create a Financial Preparedness Plan. A Financial Preparedness Plan (“FPP”) starts with a calculation of how much money you need to be independent of your business. The business value, your savings and any investment assets under your control are added to the government benefits outside of your control. Then those are compared to the amount of your need.
The need computation is a function of your, Life Expectancy, Assumed Investment Return, Assumed Inflation Rate and the amount of After-Tax Annual Income. The need computation must be an estimated calculation. For example, if you assume you will live to age 86, use age 90 or 92! If you are wrong, you want to be wrong by picking a higher number than will probably be real. You will pick a higher number for Inflation and After-Tax Annual Income. As to the Assumed Investment Return, if you think you will have a 5% return, use 4%. Be conservative. The worse that will happen is you will retire at a time when you have more than you need, rather than less than you need.
- Determine the Price to Sell For.
You need to know what the value of the business is today. We have performed more business valuations on funeral homes and cemeteries than anyone. But a good valuation points out 3 things:
- The value of the business today, of the business and its real estate.
- The effect upon the value if you correct for some low hanging fruit issues. For example, the result of changing some pricing or benefits. Remember, if a business were to sell for 6 times earnings (as an example) and we find $100,000 in low hanging fruit, that pushes value up $600,000!
- The after-tax money you must add to your personal investments. It is not the gross amount of the sale that is solely important. The net is what you get to keep and live off of.
- Determine the Who to Sell To.
The good news is you have a business. The bad news is, who you sell to may be more complex than you think. It is like the old adage for sailors… The second happiest day in a sailor’s life is the day they buy their boat, the first is the day they sell it. Your business is unique to you. Your staff and their idiosyncrasies make this business even more unique. You are not just looking to sell the business, but you are looking to sell it to someone who will be “you” in the future. It is not just about the dollars and cents of a purchase price.
There are national and regional buyers, key people, or your children as individual buyers. Each has their strengths and weaknesses. Vetting the buyer is sometimes a function of your desire. Do you want to work after the sale full time or part time? Are you needing to sell the business and its realty? These decisions can help you determine who to sell to.
In a perfect world, start aligning your data and subjective points years in advance. Maybe you find you can be financially independent earlier than you imagined. Don’t be scared to sell earlier than you anticipated if you can be financially independent. That is time to live. You earned it.