|Small Business Information|
Cashing In Your Chips & Pastures New
No, I'm not talking about gambling or dairy cows ? although business is often referred to as a gamble, I'm referring to your exit strategy. That time when you decide to 'play no more' and go off and practise your golf swing. Yup, I'm talking about selling your business?
So you own the show, good for you. You may even have a sign on your desk that says "The Buck Stops Here?But Not For Long" or some other humorous sign. The reality is though that selling your business is deadly serious ? here's why.
--- Split Personalities
You are not just one person. You are two. You are the owner of a business, if the business has shares I imagine you own them. And you are also an employee of the business (probably the GM or CEO). This means you work there too.
So what? Well those two roles, those two people have different objectives. Permit me to explain. The owner is looking for value and wealth, an increasing asset, maybe dividend payouts and other shareholder perks.
The CEO/GM wants a high salary, wants the increased income and they want it now. After all, what the heck has all this hard work been for? Again, what's the big deal you ask? Well if you are a financial whiz then you'll know already, but for most of us its all about the posted business net profits.
If you 'piggy bank' the business and take a high salary then the business probably reports very little as net profit at year end. You will probably pay less business tax to be sure, but you'll also be showing that the business is not profitable? at least on paper.
--- A Low Company Net Profit Is Not So Bad ? Is It?
Yes and no is the answer. We all know that the financial picture you present can be made to look many different ways (and I'm not talking about cooking the books here) just how you choose to allocate certain costs and expenditures. As the CEO/GM you would likely have worked closely with your accountant to develop a suitable tax reduction strategy.
Often times this works against you when it comes time to sell because of the way that businesses are often valued. There are no hard and fast rules but there are a few obvious guidelines used by many for evaluating a business for sale and purchase.
The book value: All the liabilities are subtracted from all the assets and the resulting figure is the equity or book value. (A ? L = E) Boring, but it gives you an idea.
Fire Sale: The value of the business is calculated at liquidation prices. Think pennies on the dollar. EEK!
--- My Personal Favourite
The Net Earnings equation: This formula like all of them is fairly generic, however it does give you a great way to think about things. First of all, it uses the business net profit or earnings, to calculate the figure (Now do you see why piggy banking your business when it comes time to sell is bad!) If you've got three to five years showing a nice steady net profit you can use this to calculate the next part of the equation.
Then using the NE figure you treat the business like an investment and assume that the NE is like the return you'd get on some income sitting in a bank somewhere. If your average net income for the past 3 years is $50,000 then you treat that like the interest you'd make, and figure out how much you'd have to have in the bank to make that much in interest.
For example, if you made 10% ROI then your imaginary savings would have to be $500,000. So if you think you can get 10% and you've been steadily churning out $50K in net profits, then your business would be worth about $500,000 (give or take a few modifiers.)
--- In The Next 3 to 5 Years
So if you plan to sell your business in the next 3 to 5 years you might want to take a good look at the profit your business is showing. Sure moving things around to show a greater profit will likely increase your tax liability, you may even have to forgo some of those bonuses and perks you take. However your business will then look more profitable and this will factor greatly into the overall value that you will achieve when you eventually sell your business.
And that's the whole point in the end.
Author: http://www.JamesBurchill.com - James is a freelance writer and consultant
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