Author: Tom Aranow, Harrington Daniels Advisors
In the next 10 years, tens of thousands of closely held businesses will be sold.
Business brokers and mergers and acquisition specialists, aware of the huge increases in potential listings, are licking their chops.
The reason there will be so many businesses on the market is directly tied to the ages and aspirations of the current owners of all those small to mid-size businesses. We’re all baby boomers, and we all want to retire earlier than later.
The problem for many of us is that we really don’t know what our businesses will be worth because many of us don’t understand the ways in which businesses are valued.
Every year, I speak with dozens of business owners who tell me that their retirements will be funded by the sale of the businesses they’ve been running for the past 20 to 25 years. When I ask how much that nest egg might be, they don’t know.
Often, when they do hazard a guess, they respond with numbers that I view as unrealistically optimistic based on the numbers in their financial reports.
The financial advisors they turn to this late in life face the same challenge. One of them asked me recently, “If I’m going to develop a retirement plan for a guy who’s got all his money tied up in his business, what do I use to determine how much he’ll realize when he sells it?”
The easiest answer is to say, “Go have a formal valuation or estimate of value done by a business valuation specialist.” Even then, I’m afraid that many of them are going to be very disappointed, especially those who have never shown a substantial profit.
By nature, small-business owners are optimistic. They have to be. They often work hard, break their backs and live stressful lives in pursuit of tomorrow’s big breakthrough.
The problem is that the valuation of businesses on the marketplace in generally dependent on a history of success. Buyers are willing to give present dollars for future returns when those returns are likely to be available.
Basically, if the business is making money now, it may be expected to make money later. The money the business generates will then pay back the buyers initial investment and more.
What about those businesses that have never consistently shown a profit? What should they expect? Many will argue that their businesses should sell for a high price based on what it can do instead of what it has done.
Although there are some buyers or investors who will pay for a company with truly unrealized potential, there are very few who will take substantial risks on ventures with a substantial history of poor to borderline performance.
Prospective sellers, it’s time for a reality check. Will the sale of your prospective business really fund your retirement? Your financial advisor and your wife would like to know.
Tom Aranow has over 30 years of executive management and entrepreneurial experience in a variety of industries and is the author of over 35 published articles and essays on best practices in business and not for profit management. He is the Senior Advisor for Business Strategies at Harrington Daniels Advisors, in Grafton, and Kohls Group Consulting in Pewaukee, he can be reached at 262-376-9507 or by email at tom@hdadvisors.com
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