The present value of the cash flow is a way of pricing out your company. A high certainty that the company will produce steady, predictable cash flow. Cash flow is king! Predictability only creates more value.
A buyer is willing to pay your price if you have a plethora of tangible and intangible assets and systems that function like a Swiss watch.
A “Swiss Watch” of a company needs to produce the consistent cash flow without you. As an owner you want to sell your business and move on. In many cases, a purchaser may want the owner to stay on and run the company for a period of time. However, if your company is able to produce a cash flow without you, it not only allows you to get your price, but allows you to get out of dodge.
It is worth your while to put together a talented management team, that can not only keep the cash flow consistent, but has the ability to keep the cash flow machine working even if you are not there. Your key management team may be the most important element of your business.
Whether buyers are strategic buyers, or financial buyers, they will be looking for value drivers. From the beginning of your business ownership, these are the things you need to start working on.
- Key management group
- Loyal client base with diversification (most of your firms revenue should come from more than 10% of the clients)
- Efficient production and manufacturing facilities
- Leading edge products or services
- Supplier network
- Intellectual property rights (patents, trademarks, trade name)
- Steady, predictable solid profits and cash flow
- Proven growth record
- Effective workforce in place
- Transferable franchise or license
- Key location or territory
- Barriers to entry for a startup
- Research and product development team
- Company name
- Exclusive territory
- Above industry average financial ratios
- Systematized business processes/documented so continuing success is not dependent on any particular person (including the owner)
These are the areas of your business you need to develop and maximize in order to demonstrate the potential for steady predictable growth in the future.
Since the price you will be asking for your business is relevant to your successful retirement (to fill the retirement gap), you will want to spend the time in the areas which will increase the value of your business. Usually, they will be Industry-Specific Business Benchmarks.
Knowing how your competitors are using their resources and the efficiency which they are utilizing them can give you ideas about the strategies being used, and strategies you can compare to your methods. If you are utilizing your resources better than your competitions, you will be able to negotiate a better price for your business.
What is it that you think about the most as a business owner? Chances are they are one of four things:
- What if I don’t want to stay in business and I want to drop out?
- What if I get sick, disabled, or die?
- What if my key person (s) decides to leave me?
- What if I can’t increase and improve my cash flow (life blood of the business), or the economy crashes?
Besides running the day to day of the business, and the stress that goes with this, the four items listed above are probably the biggest stressful thoughts business owners have. Let’s break them down.
Why the typical business owner thinks about these issues, is because they know they put a lot of sweat, tears, money, time into their business. They have most of their wealth in the business, and know that they have no way of extracting that wealth when these events happen!
What if I don’t’ want to do this any longer and just want to drop out?
Think about it! The business owner has most of their wealth and time tied into this business. In most cases it is very difficult to just stop doing what they are doing, lock the front door and leave the responsibility, wealth and reputation behind. They still need their wealth in the business to maintain their life style.
Business owners are human beings and sometimes they just get tired of doing what they are doing, they burn out. Sometimes they feel they are trapped and living a life of desperation. They are making a nice living, and seeking to make a great life for themselves and their families. Chances are when they started the business they were only looking for a place to go, a position, a paycheck, and with a little luck a dream. The stress of running a business can take its toll on the businessman and the family.
They need the wealth they have invested, but don’t have a way of selling the business at a reasonable price. Can the business be sold to an outsider? Or, is there someone inside the company who will buy the business? If so, do they have the money? Is there someone who would run the business while the owner keeps their hands in the business? Or, do they liquidate it? Many times, even if a business owner sells their business, they find that after the taxes and expenses there’s not enough capital at a guaranteed rate of return to produce the income needed to keep the business owner and their family in the lifestyle they been used to. Because of this factor, more stress is added to the business owner and their future income. Continue reading “The Four Life Changes Of A Business Owner!”
If I sell my business today, pay my taxes, brokers and professional advisors, and “I then invest the remainder conservatively, will I still be able to enjoy my current lifestyle?” Most business owners have asked themselves this question. After building a successful business, they wonder if they will net enough cash from its sale to maintain their standard of living. Often, after calculating the potential returns of investing the sale proceeds, they realize they can make more money by holding onto the business and becoming “passive” owners.
Continue reading “Will You Go Broke Selling Your Business?”