I would be willing to bet the answer is no. You might think you know what your business is worth. You might even have done a formal valuation to find out what your business is worth. Knowing what your business is worth is both complicated and easy at the same time.
The easy part is your business worth is a multiple of cash flow.
The easy way to figure out what your business is worth is to average your last three years owners benefit and multiply that number by between three and six. The hard part here is to figure out owners benefit. (Owners benefit is the profit the business creates plus non-cash expenses, excess cash you pay yourself, and benefits a new owner wouldn’t have to pay.)
There are some cases your business will be worth more or less than the multiple of owners benefit described above. For planning purposes it’s a good idea to use this value.
Your business lives in several values at the same time.
This is the hard part. The real value of your business depends who the buyer is and why they’re buying your business. If someone is only buying your business for investment purposes your multiple will be lower. If you can figure out how to have a buyer own your business for strategic or intellectual capital value your value will be higher.
You also are going to have to think about who the next owner is. If it’s family or managers look at a lower value. If the new owner is an outsider, look at a higher value. If the new owner is no one, then look at a liquidation value. Figuring who your business’ next owner is going to be is hard work.
You need to be realistic about your business value.
I recommend you think about lower values rather than higher values. One of my favorite planning mechanisms is to plan for the worst and hope for the best.
Most of us are going to need our business value to fund at least part of our retirement. If you’re too optimistic about the value of your business you’ll make faulty assumptions about how much other savings you need for retirement.
Put yourself in a potential buyer’s shoes when thinking about your business value.
This is my favorite exercise to see if I’ve valued a business fairly. Buyers will want to know how the business they’re buying will create extra cash. They’re going to figure out how they’re going to pay for your business and where the cash is going to come from.
You should do the same. Look at your business as if you were buying it. If you think your business is worth x ask yourself if you were the buyer would you be willing to pay the price you want. Be honest with yourself. This is probably the most important part of the exercise knowing what your business is worth.
Knowing what your business is worth is part of good financial plan.
Most business owners won’t get enough from their business to fund their entire retirement. Your business is likely your most valuable asset. Knowing what it’s worth will help you decide how much you need to save outside your business so you can afford to leave.
Just like your business living in several value worlds, your financial plan will also live in several worlds. This is where scenario planning helps. Take different values and see how it affects your retirement. You’ll be glad you did.
We have a special report we call The Four Boxes of Financial Independence. This report will help you go through an exercise to see how much your business can add to your retirement funds. It’ll also help you figure out how much you’ll need in other savings.