If you’re thinking of exiting your business in the next few years and the sale value contributes to your retirement ‘nest egg’, it’s well worth beginning planning now to grow it. Ideally a vendor should start planning exit three years before sale.

There are various ways to value a business. One method is ‘value based on profit’. A multiplier is applied to the profit of the business e.g. three or four times. The multiplier is calculated based on the efficiency and attractiveness of the business. Sometimes there is an industry average that applies.

The value based on profit method is most widely used for established traditional companies. The profit must be sustainable. Startup tech companies are often valued on other criteria, such as ‘multiple of revenue’, as investors perceive a large upside once a business is established.

To put this into perspective, in our article ‘Proof is in the Profit’, the improvement is 51%. Let’s use this as an example to see the impact this could have on the business value:

                              Previous

Profit                     $200,000

X multiplier          4

Business Value    $800,000

                              Current

Profit                     $302,000

X multiplier          4

Business Value    $1.208,000

This demonstrates that the business owner would be $408,000* better off when they exit the business. If efficiencies are achieved and the business looks more attractive, the multiplier could also increase by one or two, so this could add an extra $102,000 per point!

This could make a real difference to the owners’ retirement quality of life!

To make a business more attractive business systems should be in place so that continuation is not reliant on the current owner.

 

*result excludes any tax payable