Whichever exit strategy you choose, a crucial factor is the business valuation. You'll need to establish an accurate value for the business so you receive a fair price.
You should engage a professional valuator to help you calculate the net worth of your business. Key questions to address include:
- What do you have to sell (for example, customer lists, contracts, inventory, equipment, etc.)?
- Is your business more valuable in pieces or as a whole?
- How can you determine a fair market value?
- What can you do to improve the value of your business between now and retirement?
- How much of the value and long-term future in your business is tied to you being at the helm?
- Is the business actually building any equity?
Professional Valuation Methods
If your business is complex or has significant assets, a professional valuator can use a variety of methods to come up with a fair value, including:
Cost or asset-based approach: Simply, this totals all the business expenditures and investments to date.
Market value approach: Comparable businesses are examined and other similar transactions can help establish a value.
Earnings approach: This most common approach estimates a price based on historical or future earnings. A discounted cash-flow approach is usually applied to the future income stream.
Strategies to Raise Value
What if the value is lower than you expected? With advance planning, you may be able to raise the value before selling.
Increase income: Your accountant can suggest ways to improve your financials and bottom line, which may include spending more on marketing and sales, and cutting administrative costs.
Improve assets: You may be able to dispose of unproductive assets or buy certain assets (such as your company car) to get them off the balance sheet.
Reduce liabilities: Settle any pending lawsuits, unpaid taxes, warranty claims, etc.