Financially, Which Entrepreneur Are You?

As I discussed last week, being mentally ready to sell your business is the first step to looking at your life’s work in terms of its reward and contribution to your future, or your retirement.

So, how do you know whether you’re financially ready? On the business front, measure financial performance by going “scoreboard” and reviewing our Income Statement, Balance Sheet and Cash Flow Statement monthly. From this, develop an informal basis for determining the value of our business. When you decide to sell, you may solicit the help of a CPA, exit planner, business valuation expert and investment banker to harden those numbers and get an idea of what the market is willing to pay for your business.

Equally important, you should meet regularly with a personal financial planner or wealth manager to determine what you have, and what it would take to maintain your current lifestyle and meet your exit and retirement goals. 

These two aspects – business and personal – are vitally linked in overall net worth and, more importantly, to what we want out of life, yet typically they are marshaled by separate advisors. Most owners never fully synch the two in mutual alignment to help them reach their goals. The largest unknowns in the process of establishing financial readiness is the value of your business and the market’s appetite for what you have helped create. This makes the process hard to predict for many companies and their owners.

In a survey of business owners, Mass Mutual found that the average owner overvalued their business by 59%. If you are like most entrepreneurs, the relatively illiquid value of your company represents 70%-80% of your personal net worth – a chunk that is far too significant to gauge inaccurately.

If averages hold true for you, and 75% of your net worth is trapped within your company, at an approximate 20MM pre-tax valuation (per your estimate) you would run out of money 59% faster than you currently predict. Expressed in real dollars, your firm would likely worth 8.2MM not 20MM on a pre-tax value basis. So let’s get real with the numbers.

What is my business worth?

Step one to figuring out how fiscally fit you are is to understand the value of your assets. Zillow may give you an idea of your house’s value, but I strongly recommend beginning the processes by having a certified valuation of your company to benchmark its value, and as markets change, have it updated every year or two. Your CPA can partner with an investment banker to give you the financial valuation and – equally important – the market-based valuation of your company, the industry, and the capital market’s appetite for firms like yours.

Are you financially ready to sell your business?

Having gone through this process and “what if” scenarios, it is often helpful to have an outside perspective to help you align your mental and financial readiness based on what the numbers tell you. If you are not pleased with your current value, it may be time to speak with someone capable of narrowing the gap between your actual and perceived value, and help you get to your goal.

M&A Axiom:

The #1 deal killer in M&As is a seller’s value expectation vs. what the market is willing to pay. 

Getting expectations correct is the first job of the M&A Investment Banking advisor. Having someone that can bring these realities into greater focus and  bridge any value gap over time can be very valuable. Where gaps exist, they can be filled with proper strategy, planning and building the right team.

In speaking with many entrepreneurs – and being one myself – I have found that in terms of financial preparedness and readiness to exit, there are typically four types of entrepreneurs.

Financially which business owner are you?

1.   Fiscally Fit: Well off – Future lifestyle not dependent on sale of business.

2.   Financially Illiquid: Not well off per se, most of worth tied up in the company, future lifestyle dependent on sale.

3.   Burnt-Out: Financial concerns are secondary / done with day to day. Find me a seller at the highest price, I want out! (business is profitable).

4.   Risk Mitigator: Not well off; May be feeding the company and must sell ASAP to avoid further fiscal impact (business not profitable).

At first blush, profitable exit opportunities seem to only exist for owners 1 & 2. However, exit events or partial exit events are possible for every one of these owners. Given the individual needs of each owner, the exits may look very different for each individual and company. However, value can be achieved with the right mental preparedness and financial planning to achieve the owner’s desired outcomes. 

I suspect you will be able to easily identify which business owner or entrepreneur you are in the above list, and even be able to assess your own mental readiness for making the transition. The next step is integrating the two in a cogent assessment of where you are and where you want to be.

The hardest question for most business owners who have been so focused on growing their companies is: What do you want now?

In short, you can extract additional value out of your company over time in a planned exit – but first you must assess your mental and financial readiness and willingness to improve your company’s value, or get out while the going is good.

As we examined in an earlier article, the final aspect of exit readiness is market readiness.

Anyone can exit; however, exiting profitably takes both mental and financial preparedness, the right market, and the right team on your side.

Exit Well!