Consider the implications of the following statistics:
|•||Sixty-three percent of private businesses are owned by baby boomers.|
|•||Approximately 10,000 baby boomers are reaching retirement age each day.|
|•||Seventy-eight percent of business owners expect to fund 80% or more of their retirement through the sale of their business.|
|•||Only 20% to 30% of the businesses that go to market actually sell.|
While a massive number of people are retiring each year and counting on the value of their business as part of their retirement plan, many are unable to actually generate any liquidity beyond normal compensation. They may even have a very valuable business, but can’t convert any of that value into cash. What a terrible situation! They may feel like a sailor stranded on a desert island—surrounded by water, but dying of thirst.
Attaining liquidity from your business and increasing business value are two topics that go hand in hand. Factors that increase business value often also increase the ease of selling the business. Even if your plan is to never sell, increasing profitability and liquidity will make planning easier. In this blog post, we will identify five ways business owners can improve business value and increase the likelihood of selling the business at a desirable price.
Businesses are often valued by using an income metric (such as earnings before interest, taxes, depreciation, and amortization, or EBITDA) and a valuation pricing multiple.
To increase business value, business owners can increase the valuation pricing multiple, increase income, or both. Focusing on improving the multiple is often a more effective way to increase business value.
Business risk is the key driver of the multiple. Five effective ways to improve the multiple are:
|1.||Reduce reliance on the owner of the business|
|2.||Incentivize key employees to sign long-term employment contracts|
|3.||Diversify the customer base|
|4.||Create sustainable recurring revenue|
|5.||Maintain immaculate financial statements|
By planning ahead and implementing the above steps, business owners may be in a much better position for retirement.
P.S. We will be exploring these topics in our Value Acceleration presentation series, running monthly for the first half of 2019, in our Portland office. If you would like to attend one of these sessions, please contact me. We would love to have you attend. We’re going to be focused on the process to increase the value of your business and build liquidity into your life.