I know a lot of landscape business owners have a goal of selling the business to help fund their retirement. Whether or not that’s possible all depends on your preparation NOW. Here’s business valuation expert Dan Doran’s excellent advice.
You worked really hard to create a business and you probably still work really hard in that business. However, we all have to retire some day. Your inevitable exit from the business is somewhere on the horizon whether you have allowed yourself the time to reflect on this or not. You may know how far off you’d ideally like that exit to be, but have you done the planning to be sure that date is realistic?
If you are like most small business owners, nearly 80% of your net worth is represented by your business. Further, most entrepreneurs anticipate that selling their business will be the largest single source of funds for their retirement. Knowing what your business is worth can give you a solid platform from which to make your financial decisions, like: How much can you expect to sell for? Is this enough to fund my retirement? And what do you need to do before selling? If the value today is enough to meet all of your retirement needs then you can proceed to the sale. If the value needs to grow before you sell then you can implement strategies now so that you will reach your projected exit/sale date.
Some really good food for thought before we dive into exit planning and determining what your business is worth: remember it’s a company, not a job. You’ve worked hard to create a company that ideally pays you a reasonable salary. But when it comes time to sell you don’t want to sell a job, you want to sell a company. You can’t do that if every activity in the company is somehow dependent on you.
So where do we begin?
The Problem: “I am the Business”
Here’s a scenario: you own and work in a landscaping company. You are responsible for all selling, client relationships, and scheduling. You pay the bills and negotiate with vendors and deal with insurance. You also spend a good amount of time out on job sites. And if you get hit by the proverbial bus it’s not going to be all that long before the business will literally cease to function.
Sound familiar? In that context how much is the company worth to a buyer? Not much. In most transactions the buyer wants to see you exit the business. But if the company essentially walks out the door when you do at night you’ve got a real problem.
We call this concept Personal Goodwill. Goodwill is the “blue sky” value attached to your company – the amount in excess of hard assets. Personal goodwill is the amount that’s attributable to you. While it’s good to feel important and valuable, personal goodwill is bad. This goodwill is non-transferable and ceases to exist when the individual(s) leave/sell the business. In the context of a sale it does not add value to a company- afterall, how could a buyer purchase it?
The Solution: Work Your Way Out of a Job
In order to enhance the value of your business you will want to make necessary changes to show that your business can exist, thrive, and grow without you. Two quick fixes for shifting the weight of this personal goodwill are to:
Create well-defined systems and processes. How do you run your business? Is it all in your head? Do you have a notepad or a personal laptop that only you have access to and only you can figure out the “filing system” for? The common word here is you and it is time to share this information. Take some time to thoroughly outline all of your business related processes from how you advertise and meet new clients, to how you recruit and train new employees. Every bit of this valuable information will be just that, valuable, when it comes to selling your business.
Hire someone to run the daily operations. Likely you have been out in front of your business since day 1 and now it is time to show yourself, your employees, and your customers that someone else can do the things that you do. Not only will this build confidence that the show can go on without you, it will free up your valuable time to focus on higher-level agenda items like strategies for growth and sustainment. Doing this now will allow you the maximum time required to impart your knowledge and experience.
These two actions will eliminate some of the you (personal goodwill) from your business and prepare the business to make a smooth transition of ownership with minimal disruption of productivity. Having clearly defined business procedures and someone other than you running the daily operations makes the business more appealing to a potential buyer and more valuable thus bringing you a higher sale price and more money to fund your retirement.
Dan Doran is the Founder and Principal of Quantive Business Valuations, a certified valuation practice serving privately held businesses nationwide. He consults on hundreds of valuations each year, ranging from cases of divorce litigation or SBA 7(a) lending requirements to buy-sell agreements or purchase and sale proceedings. Dan’s immersion in the valuation process and extensive work in Mergers & Acquisitions throughout the first decade of the new millenium provide him with a unique “behind-the-scenes” perspective on successful business transactions, growth strategies and the nuances of value drivers within emerging industries.
Dan is an avid blogger and writer on a variety of business issues, including valuation, start-ups, growth, exit planning and structuring transactions. He has recently been published by New Jersey Banker, Virginia Business Journal, YFS Magazine, CBO Magazine, and New England Banking. Learn more at quantivevaluations.com
Quantive Business Valuations is a pure-play business valuation firm. We focus solely on providing business appraisal, valuation, and transaction advisory services related to closely held organizations throughout the United States. We are highly specialized in our exclusive focus on valuation related matters. Without tax and audit related commitments, we remain uniquely independent and unbiased in our viewpoints. Quantive routinely works with small business owners for a variety of reasons to include exit planning.