The wonderful thing about selling your business is that a buyer pays you a multiple of your profits. You’re effectively being paid for years still to come, allowing you to either move on and do something else, or actually take a break.
Of course, the ultimate position to be in is one of working because you want to, not because you have to. This is financial freedom at its finest, where you spend your time doing what you enjoy and your wealth manager has a quarterly meeting with you to show you how your money is growing. To achieve that outcome, you need to sell your business for so much money that you never need to work again.
The road to get there is tough. The fact that you’re reading this article suggests that you are already on that road.
The question is: how do you navigate that road?
First, know your number
To achieve financial freedom, you need to be paid a certain amount for your business. This number is different for everyone, driven by variables like your living expenses and family needs. The country in which you operate is also a factor, along with realistic opportunities available to invest the funds and live off the associated income.
Figuring out that number is something that you should do with a wealth advisor. Once you have it, you are at least armed with the knowledge of what the minimum ideal exit looks like. You may choose to exit below that number, but then you need to be prepared to continue working without the option to simply sit back.
Our view is that you cannot plan for the ideal exit if you don’t know what your minimum required exit value looks like.
Not every business can reach that number
Simply knowing your “sit back and relax” number doesn’t mean that it’s realistically possible with your current business. Any credible exit planning process should include a plausible financial forecast based on various different scenarios. At bizval, we help clients with scenario planning and the impact of different key variables on potential exit values.
In this case, knowledge truly is power.
Some businesses simply can’t get big enough to achieve the financial freedom number on an exit. In fact, this is an issue that many entrepreneurs face, which is why they end up working in the business rather than on the business for so long.
Can the model be tweaked to achieve a different outcome? Is it time to bring in a professional manager and spend your time on another project that can achieve a bigger exit?
Without an understanding of (1) your desired exit number and (2) the potential value of your business, it’s impossible to perform this analysis and make these decisions. We can’t assist you with the first part of that equation, but we can certainly assist with the second part.
Is there an ideal time to sell?
Like in most things in life, timing is everything. The value of your business is ultimately a function of how much it makes and what multiple you can be paid on that number.
It doesn’t help to be paid a really juicy multiple on a small profit number, as you probably won’t hit your desired exit number. Similarly, hanging on too long and running out of growth runway or attracting competitors in your industry can lead to a lower multiple down the line on a fairly stagnant profit number.
In a previous article, we discussed how owner dependence diminishes over time and how this generates value in a business. There are other factors that impact the valuation multiple, like track record and growth expectations. Inevitably, growth slows down over time unless the business is truly exceptional.
Our data suggests that businesses between five and ten years old tend to attract the highest average valuation multiple. This is because that period is the intersection of track record and growth expectations.
Due to a decrease in growth rate as businesses tend to mature, those that are more than ten years old are valued at a multiple that is roughly 15% lower than the five-to-ten-year cohort.
Notably, businesses less than three years old attract a multiple that is 60% lower than the five-to-ten-year cohort. The lack of track record and owner independence overshadows the benefit of high growth.
We have a large proprietary data set of private company valuations. By working with bizval, you can see how you stack up against businesses of a similar age and in a comparable industry. Our professional team is also able to offer additional services tailored to your needs, like scenario analysis on key variables in the valuation.
Our goal is to deliver simple valuation insights to business owners to help them make the right decisions. We know how hard you’ve worked for what you have. We want to help you maximise that effort.Get Started Get Started Reach Out Reach Out