You have spent years building a successful company and it’s time to start planning for retirement. As a shrewd business owner, you begin working with a team of trusted advisors on a succession plan that will involve a transfer or sale of the company. Hoping to avoid the cost of hiring another advisor, you decide to estimate the value of the business using a standard multiple or “rule of thumb” common to the industry. It appears that your company could be worth 3.0x average net cash flow based on what other businesses have sold for in the marketplace. You ask yourself, “is this a reasonable estimate?”
This type of approach is sometimes used because it’s easy to apply and takes into account several value drivers into a single point estimate; however, its relative simplicity is what makes it prone to misuse. For this very reason, estimating value in such a manner can become highly problematic to your succession plan. Accomplishing your financial goals may depend on the ability to convert the value of your business into cash. If the company is priced too high, it may limit the pool of potential buyers and/or lengthen the time required to complete a transaction. If the company is priced to low, it may cause you to adjust your income expectations for retirement.
Knowing the value your business may command in the marketplace is essential to achieving your retirement goals, especially if it represents a substantial portion of your net worth. Why take the risk of not knowing? Call South Park Advisors today for a consultation.