To sell or not to sell? This is the question every business owner asks themselves — whether you are 35, 45, 55 or 65 years old. Unfortunately, there is no single answer to fit all circumstances.
However, a little soul-searching, blended with some logic and awareness of certain financial aspects, will help you build your own measuring stick to fit your situation and make things clearer.
DO THE MATH
Let’s use an example of a business (S Corp, for tax purposes) doing $1.5 million in annual revenues, with about 20 percent of such amount ($300,000) going to the business owner in salary and perks each year.
An eight-to-10 times free cash flow multiple puts the value of the company at somewhere between $2.4 million to $3 million (1.6 to 2.0 x revenue). Also, assume there are $100,000 in liabilities outstanding for vehicles, and another $50,000 of customer prepaids at the time of the sale. This would leave the owner with about $2.25 million to $2.85 million before taxes, and $1.575 million to $1.995 million after taxes, assuming a blended federal and state rate of approximately 30 percent.
Not bad. But is that enough? Answering the following key questions should provide some guidance when making your decision to sell:
- How old are you presently and, given your health, how many more years do you want/need to work in the business to reach a point where you feel you have fulfilled financial responsibilities to yourself and your family (i.e., single, divorced, children, parents, etc.)?
- Is your business still in a growth/expansion mode, or is it a mature/declining business due to increased competition, loss of key employees, or loss of motivation by the owner?
- If you sold your business now, would the after-tax sale proceeds provide you sufficient income replacement for the number of years you expect to live, or will you have to seek a new career?
- Does your business have existing employees (or family members) to fill your company role if you were to become unable to work due to disability — or if you needed to work part-time drawing a salary or potentially retire and draw a pension?
- How important are you, personally, to your business in terms of maintaining client relationships vs. internal administrative systems that work efficiently regardless of whether you are there on a daily basis, or retired, or a part-time employee?
- Do you have financial resources available outside of what the business provides you to maintain your lifestyle and financial obligations? For example, maybe you have an inheritance, a pension, or equity vested from a prior career.
- Are you tired of the business?
CONSIDER THE MARKET
Multiples have expanded significantly in most asset classes over the past several years. And while COVID 19 gave a brief pause to merger-and-acquisition (M&A) activity, it seems there are several purchasers who have come back into the market. While these firms are looking for quality, well-run companies to purchase, valuations have only been slightly affected. So, for the time being, the M&A market is cautiously re-engaging.
The tailwind that may affect after-tax sale proceeds going into next year could be buoyed by the fact that the U.S. government has injected so much stimulus money into the economy that it would make sense that taxes will need to go up. That said, even if valuations remain the same, as a seller you may not net the same amount — since a larger slice of the pie will go to the tax man. In other words, if you are considering selling, 2020 may be the year to explore your exit plan.
GORDON is managing director of PCO M&A and Succession Specialists, a merger and acquisition consulting firm consulting firm that caters to pest management professionals throughout the United States. He can be reached at email@example.com.