If you own your own business, it is usually a material part of your wealth. Understanding its value can be a key component of our future retirement/slow down plans. Most Entrepreneurs will attribute a high-level value to their business when considering their retirement plans. Entrepreneurs are, by their very nature, positive people and may overvalue their business or underestimate the risk associated with selling their business on retirement. The opposite may also be true, you may be so stuck in the day-to-day operations of the business that you miss the true value someone else may see in your business. Whichever way you want to avoid the risk of getting it wrong.
Getting an unbiased, professional, and independent view of the true value of your business, and what you could expect to pocket on exit, will improve the accuracy of your retirement plans and help avoid under or overproviding for your retirement.
Valuing a business is easy, but valuing it correctly is not. It may seem that valuing your business is simply a matter of applying an EBITDA multiple, to an EBITDA you believe is sustainable. However, reaching the fair market value for a willing buyer and seller, and then playing this forward to your expected exit date requires a lot of process, thought and experience.
On top of that you, as the business owner, may have a natural bias towards overvaluing. We expect no less as successful businesses require a positive mind set and a belief in the ability to deliver. The buyer is however coming to kick the wheels and drive the price down and it is rare that the seller achieves their full expected asking price. Selling at a fair value improves the probability and speed of sale.
Once you have determined the fair value of your business you need to translate this into the after-tax cash outflow to ensure that the expected after-tax inflow is used to determine your retirement plan. There are a few ways that a business sale can be structured, each with a different tax consequence. The amount that the tax man takes is material and this needs to be considered carefully.
Even though your retirement may be a long way away, the sooner you know what after-tax cashflow you can expect the longer you will have to adjust your retirement plan and, when it comes to preparing for retirement, time is your friend.
Other good reasons for valuing your business and considering your eventual business exit sooner
rather than later are:
- Identifying what drives the value of your business. If you understand the key drivers, and how they impact future value, you can purposefully target them as part of the day-to-day operations of your business to substantially increase the value of your business. Our valuation process will identify these key drivers. The earlier you identify and target these drivers, the longer the time available to grow your business value and to benefit from the compounding effects on the higher value.
- Tax planning opportunities. There are a few ways that may be available to structure your affairs on your eventual exit to reduce the tax impact of selling. The earlier they are implemented the greater the final benefit you will obtain.
- Lastly, if the perfect opportunity to sell does arise you need to be ready. Knowing the true value of your business is one vital aspect of being ready.
If you are interested in valuing your business, or considering how to maximize your eventual exit from your business, please feel free to contact Andrew, the CEO of Agilequity, on andrew@agilequity.co.za or on his mobile +27 82 829 5173.