We call this future financial need one’s “Happily Ever After Number.” Successful business owners will be able to reach this financial goal primarily from the sale of the business. They will do this by closing the value gap between the value of the business today and that future value needed to fund their Happily Ever After Number.
Step 3: Know How The Business Is Valued
One of the best ways to understand how businesses are valued and what drives that value is to work with one or more valuation consultants. Advisors who prepare valuation reports and merger and acquisition/business broker specialists can provide helpful insights.
Businesses are generally valued using a multiple of adjusted earnings. Obtaining a current valuation will provide a current assessment of these factors.
Given this information, business owners can begin to plot valuation measures using operating budgets and other management tools to estimate the value of the business under different scenarios. Plotting what the earnings and valuation multiple must be in the desired time frame will also help the business owner understand the growth rate needed to reach their goal. An unrealistic growth rate may provide valuable input into the planning process.
Step 4: Understand Who The Business Owner Cannot Afford To Sell The Business To
Let’s assume a business owner needs $10 million from the sale of her business. She would get $8 million if she sold it to a family member and possibly as high as $12 million if she sold it to a strategic buyer. What should she do?
Business owners should evaluate their exit strategy from the perspectives of their realistic sale desires, options and opportunities. Some buyers or succession options may value a business for higher values than others, but those options may not align with the owners’ end goal for their business.
Step 5: Run The Business With The Goal Of Leaving It In Mind
Once business owners have a target value and exit/transition strategy, they can begin to integrate these objectives into the running of the business. Value Management, integrating value drivers and performance targets into operational objectives, can help guide business managers toward the value target within the desired time frame.