One question I always ask business owners as they start thinking about succession planning is “How much do you need your business to be worth?”
The answer usually involves a figure, perhaps “It’s worth £500k”, to which I reply:
“Forgive me, but that wasn’t the question. How much do you need to sell your business for?”
You see, the value of a business is only relevant when compared to the owners’ How Much Is Enough figure. If the business is ‘worth’ £500k but the owner needs £1m, then the business cannot be sold yet.
On the other hand, if the owner needs £500k and the business is ‘worth’ £1m, then the owner has options.
So what does this ‘How Much Is Enough’ expression mean?
The Value Of A Financial Plan
The expression refers to the objective of financial planning. This is a process by which we take a guess at what sort of future we might want, take into account factors such as income and assets, then forecast this to see if that future is obtainable.
In theory, financial planning is really very simple. First, you work out what you want from life, then you spend your money on that.
However, working out what you want from life is harder than it might seem. That’s where a good financial planner comes in.
This process of financial planning, then, gives a better idea of how much you need for the life that you want. The net result should be the answer to the question ‘How much do you need your business to be worth?’
The Value Of Your Business
Earlier in this piece, I put the word ‘worth’ in inverted commas. This is because the value of a business is also not something that is decided by the owner. It is decided by market forces.
We should also touch upon the ‘endowment effect’. This is a well-known character train in psychology that means we tend to value higher something that we own more than others might. When this item is a company that we started twenty years ago and on which we have worked night and day with great sacrifices, the endowment effect can be magnified considerably!
At an early stage in the process, therefore, it is advisable to seek advice on what might be a realistic value of the business. This might come in the form of a formal independent valuation from a suitably qualified accountant (although this will come at a price), or by talking to others who might have sold their business.
Once these two numbers have been obtained you will have a better idea of the task ahead as you prepare the business for eventual sale.
In order to get an idea of when the sale of the business will be feasible, the following sum needs to be achieved:
How Much Do I Need To Sell My Business For must be greater than The Value Of My Business
If this is not currently achievable, then this needs to be factored into the process. For an owner working towards selling to an Employee Ownership Trust (EOT), this gives clarity over how the business needs to grow whilst being prepared for sale. Or perhaps the size of the gap will determine how long it might take before the sale is feasible.
Of course, if you undertake this process and this sum is already achievable, then you have options! This might include being able to sell at a lower value; having the earn-out over a longer period, or perhaps gifting some of your shares into a charitable trust which you could then run.