OK, I’ll tell yah. I’m not going to dance around and throw out formulas or “Rules of Thumb”. I’ll deliver a straight answer. No double talk. No “consult your accountant”. No “call my 800-number”.
A small business is worth what it can afford to pay for itself, period. Of course there are just a few or more variables when retirement is the purpose for the valuation…… Read on.
In my world a Small Business has sales between $100 thousand up to $10 million per year. In fact, over 97% of the businesses in America do under $10 million in sales.
A standard valuation establishes a buy/sell price estimate and little else. So for retirement purposes a standard valuation falls short. It becomes the Base Valuation and just one element of a Retirement Valuation. The RV is a holistic approach that answers the big picture question, “Can I financially retire with peace of mind?”
Here are just a few additional elements reviewed and used in a Retirement Valuation:
- What impact would different transaction scenarios have?
- Asset or stock sale? Retained notes? Lease liabilities? Future profit sharing?
- Is the business location Real Estate owned by the business owners?
- If so, should they sell the RE or Lease to the new Owners?
- What is the impact from the lost benefits now enjoyed as a business Owner?
- Perks, medical Ins., travel miles, vehicle use, Etc.
- How long would the new Owner need for training or a transition period?
- Should these be separately compensated or included in the selling price?
- What are the Owner’s non-business assets and investments?
- Other Real Estate both personal & commercial, stocks, bonds, trusts, 401K, insurance, Etc.
- And many more…..
In addition to a realistic selling price the RV will show how much the Seller gets to keep and how it will be used for future income. The process is called “Functional Asset Allocation” and it shows all assets including personal and commercial Real Estate by their function vs. the stocks N bonds pie chart used in most investment models.
A small business is worth what it can afford to pay for itself, period. With just a few or more variables.
Let’s look at an example.
We all know who they are so I’ve disguised their business and their names. Gunna and Letz Feedum own seven “Squat-N-Gobble” sandwich franchises. They started their first sandwich shop in 1985 and added the others over 15 years. From the beginning the Feedum’s lived modestly and are debt free. They reinvested into buying the Real Estate at five of their S&G locations and have long-term leases on the other two. In addition to their home they have a money pit four-plex with a spotty rental history.
Their combined salary is $250K. Both are 62 but look 52. They hope to retire within a couple of years, but can they?
The Base Business Valuation for the seven S&G franchises and the owned locations totaled $5.2 Million. You would think that would be enough to hang up their paper hats.
However, the Retirement Valuation including all their income producing assets, liabilities and after all adjustments, taxes, fees, Etc., boiled down to $3.7 Million. Still a lot but Gunna and Letz’s current income including perks is actually $418K. A total sale at this time won’t replace their income and grow with time to cover them until they are 100. Yes 100 is the new 80 for retirement planning.
Through this process the Feedum’s now know what strategies and initiatives need to be employed in the next two tax years to maximizing the business value and restructure their other holdings to assure a long-term sandwich free retirement.