If you own a business, it is usually a material part of your wealth. Understanding its value can be a key component of your future retirement/slow down plans.
Most entrepreneurs will attribute a high-level value to their business when considering their retirement plans. Entrepreneurs are, by their very nature, positive people and may overvalue their business or underestimate the risk associated with selling their business on retirement. The opposite may also be true, you may be so stuck in the day-to-day operations of the business that you miss the true value someone else may see in your business. Either way, you want to avoid the risk of getting it wrong.
How To Correctly Value Your Business
Getting an unbiased, professional, and independent view of your business, and what you could expect to pocket on exit, will improve the accuracy of your retirement plans and help avoid under or over providing for your retirement.
It may seem that valuing your business is simply a matter of applying an EBITDA multiple, to an EBITDA you believe is sustainable. However, reaching the fair market value for a willing buyer and seller, and then playing this forward to your expected exit date requires a lot of process, thought and experience.
On top of that, as the business owner, you may have a natural bias towards overvaluing. We expect no less as successful businesses require a positive mind set and a belief in the ability to deliver. The buyer is however coming to kick the wheels and drive the price down as it is rare that the seller achieves their full expected asking price. Selling at a fair value improves the probability and speed of sale.
Once you have determined the fair value of your business, you need to calculate the after-tax cash flow to accurately shape your retirement plan.There are a few ways that a business sale can be structured, each with a different tax consequence. The amount that the tax man takes is material and this needs to be considered carefully.
Even though your retirement may be a long way away, the sooner you know what after-tax cash flow you can expect, the longer you will have to adjust your retirement plan and when it comes to preparing for retirement, time is your friend.
Other good reasons for valuing your business and considering your eventual business exit sooner rather than later are:
- Identify and target key value drivers in your business to substantially increase its worth. Our valuation process highlights these drivers, helping you focus on them in daily operations. The sooner you act, the more time you have to grow your business value and benefit from compounding effects.
- Explore tax planning opportunities to reduce the tax impact when selling. The earlier you implement these strategies, the greater the final benefit.
- Be prepared for the perfect opportunity to sell by knowing the true value of your business. This readiness is crucial for a successful exit.
If you are interested in valuing your business, or considering how to maximise your eventual exit from your business, please feel free to contact Andrew, the CEO of Agilequity, on andrew@agilequity.co.za or on his mobile +27 82 829 5173.
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