A couple of business owners had a perceived value of their business that differed greatly from the actual value. As a result, they had to seriously alter their business and succession plans. Here’s the story:
I met with a client to discuss their succession plans and the value of their business. The couple was in their early 60’s and was looking to retire from the business they had owned for about 15 years. The business had grown significantly over the years and was now posting $2.5 million in sales. In their minds, the logical next step was to sell the business to their son for $2.5 million. They figured that, after taxes, they would have $1.5 million, which would allow them gradually retire from the business over the next couple of years.
The plan sounded great; however, there were three MAJOR problems.
- They assumed the business was worth $2.5 million without any outside verification.
- The son had very little savings and could not afford to make any down payment.
- The owners insisted that they would not change their lifestyle upon retiring. Therefore, they could not accept less than $2.5 million.
After completing a valuation, I determined that the business was worth close to $800,000 – nowhere near the $2.5 million they were expecting.
Obviously, the owners were initially upset and in disbelief upon hearing the news. Those feelings eventually changed to disappointment after we went through the entire valuation report together and I showed them how I reached my conclusion. In addition, I illustrated that no bank would finance the transaction at $2.5 million since the debt service would be almost twice as much as the current cash flow from the business.
This is when the owners realized their retirement plans would either have to wait until they were able to build up the business or alter their lifestyle to make up for the loss. While they could have found a synergistic buyer who could afford to pay a higher price, it was not a desirable option since many of the business’s existing employees would likely not be retained.
What if those owners had a realistic value of their business in the years leading up to their initial decision? They definitely would have had a better idea of what their business was worth and could have planned accordingly. Often, the high cost of a valuation deters owners, and, as a result, the wrong succession plans can be made.
Don’t Make The Same Mistake
What if you had access to the realistic value of your business at a price point much lower than a full valuation. This scenario does exist and the benefits would be endless since knowing the realistic value will help you in all of the following situations:
- General business planning
- Owner’s succession and financial planning
- Annual exclusion gifting
- Determining buy-sell agreement values
- Annual reality check on business performance
- Exit planning analysis
- Determine if the business is in a sellable position
While a know & grow valuation is designed for internal purposes only, the knowledge gained will help you make the proper decisions about your future and that of your business. You don’t need to let the high cost of a valuation allow you to make the wrong succession plan decision.
Email the business valuation team at Rea & Associates to learn more about the know & grow business valuation process.