Cindy (not her real name) has a good thing going. Her business is growing at a steady pace, and she’s been able to pocket around $500,000 a year the past several years. I recently met with Cindy and her husband to discuss her interest in selling. “I just became a grandmother. My daughter and her husband are going to need more of my time than I can give if I’m still running the company. I’d like to sell it now and live off the proceeds.”
Cindy told me she and her husband were hoping to sell the business for $13 million. It would take a whole other blog to explain why this estimate was wrong. Suffice it to say, their expectation was high by about $10 million. Yes, I said high by $10 million.
Expecting to retire on $13 million when your business is worth $3 million is a very disappointing place to be. Now, don’t get me wrong, $3 million is a lot of money, I know many business owners who’d love to sell their business for that much. But for Cindy and her husband, $3 million selling price is well below their expectation, and simply not enough to retire on. Once they pay taxes on the $3 million, they’ll have about $2.25 million to fund their retirement. On a conservative after-tax basis, that means they’d have about $80,000 per year to live on. But Cindy has been used to making $500,000 a year. She acknowledged she could reduce her spending levels somewhat, but not from $500,000 to $80,000. I watched as she turned to her husband and said, “We can’t afford to sell the business.” The sense of disappointment was palpable.
I’ve seen many situations like this. The owner has an unrealistic sense of the business’s value, causing them to make bad assumptions about their retirement. This problem is a result of the owner not knowing how their business is valued, while assuming that selling the business will fuel their retirement. Simply said, this is a lack of planning and/or planning without professional guidance.
I do not think Cindy and her husband have the energy to take the business to the next level. Meaning, what must be done to move the $3 million valuation even closer to $13 million might not be doable given their new personal commitments. They are stuck.
In my perfect world, every owner would value their business once a year. Being realistic and up-to-date about your business valuation and what the sale proceeds can generate would eliminate a situation like Cindy’s when the owner is surprised to learn that they literally cannot afford to sell. Being attached to your business is like being attached to a dialysis machine, you cannot afford to be away from it.
Tennessee Valley Group
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