At Sponsel CPA Group we often encounter business owners who haven’t given enough serious thought to their exit strategy, whether it’s retirement or a new venture. In these cases, they often haven’t done very much to determine the value of their company — even though it’s usually the chief source of liquidity after a sale.
Over at The Exit Planning Review, T. Ray Phillips has an excellent new article up that addresses this subject, “Knowing Business Value is a Very Good Place to Start.”
You can read the entire article by clicking here.
He writes:
“Knowing the value of your business today is critical whether you plan to leave your business tomorrow, or in five years because:
- An estimate of value establishes your starting line and distance to the finish. An estimate of value tells you where your unique race to your exit begins. Your job, whether your company is worth $500,000 or $50M, is to fill the gap between today’s value (the starting line) and the value you need when you exit (the finish line). Based on today’s value, your race to the finish may be shorter, longer, or perhaps much longer, than you expect. Once you know how far you and your business need to travel, you can begin to create timelines and implement actions to foster growth in business value.
- An estimate of value tests your exit objectives. An estimate of value helps you to determine if your exit objectives are achievable. Let’s assume that you decide that your finish line (financial objective) is to receive $7,000,000 (after taxes) from the transfer of your business interest. You also want to complete your race in three years (timing objective). An estimate of value will tell you if the distance between today’s value and the finish line is too great to reach in three years. If a growth rate is unrealistic for your business, you must either extend your time line or lower your financial expectations.
- An estimate of value provides important tax information. First, an estimate of value gives you a basis for analyzing the tax consequences of Exit Path alternatives. Once you choose your path, the value estimate provides a basis for your tax-minimization efforts. Taxes can take a significant chunk out of a business sale price so the value of your company (what a buyer pays for it) must usually exceed the amount of money you need to fund your post-exit life. The size of that excess depends on how you and your advisors design your exit, and exit design in turn begins with knowing starting value and the distance to your finish line.
- An estimate of value gives owners a litmus test. When owners know how much value they need to create to meet their objectives, it helps them determine where they need to concentrate their time and effort. Instead of growing value for the heck of it, dedication to a goal may enable owners to exit sooner with the same amount of after-tax cash than owners who do little or no planning. Pursuing exit plan success all begins with a starting value.
- An estimate of value provides an objective basis for incentive plans. As you design incentive plans for key employees (such as Stock Purchase, Stock Bonus and Non-Qualified Deferred Compensation Plans) to motivate them to increase the value of your company (so you can successfully exit) you must base these plans on an objective estimate of value. You and your employees need a current value (or starting line) that you all can confidently rely on.”
Please read the entire article for more of Phillips’ analysis and information. And contact me at (317) 608-6694 or email [email protected] if you need to jump-start your own exit planning.