Thursday 20 October 2016

How Much Money Do You Need from the Sale of Your Business to Retire Well?

Posted by at 9:28 AM in

How Much Money Do You Need to Sell Restoration Business For?

When was the last time you thought about this? The day will come when it’s time to sell. Let's look back to the beginning and ask, "Why did you start your business?" Wasn’t it to build a business that could one day fund your retirement? Now let's look to the ending and ask, "How much money do you need to retire well?" If you began with the end in mind and are building a business that one day someone will want to buy how much do you need from the sale to comfortably retire? This is an all-important matter and your answer will go a long way in determining the steps you need to take to grow your business to that level.

Most owners would not want to retire with less than $1 million in retirement savings. So let’s start with that number as the goal and let’s begin reverse engineering from there. The value of your business is a result of its net profit plus seller’s discretionary expenses. Buyers are not interested in how much money you make, but in how much money you keep. The concern is not over revenue but with profit. Generating $1 million in sales but having only $50,000 at the end of the year won’t cut it for most prospective buyers, and won’t get you to your goal of a high dollar sale. Here’s a good starting point - $3 million in sales and 20% net profit will produce $600,000 in year-end net profit. Seller’s discretionary expenses for salary, retirement benefits, a vehicle and gas, and other benefits and expenses may equal approximately $150,000. Add the two together for a total of $750,000 of recasted year-end net profit. Do this for each of the last three years and divide by 3 for the average. Giving double weight to the most recent full year and dividing by 4 is also a reasonable average. Let’s assume the three-year average is $750,000. A multiple of 3 is common for an independent restoration company that is well run. 3 times $750,000 is $2,250,000. This is a good number to begin with as a reasonable projected sales number that would exclude the value of any real estate in the deal. If you are selling a building for $500,000 this would be added to the sale price.

Keep in mind that most owners have a fairly large indebtedness against real property so this will be paid off at Closing out of sales proceeds. For our purposes let’s focus just on the value of the business itself not including any real property. We begin with the sales price of $2,250,000. The asking price is going to be discounted by a buyer by at least 10% - 15% since you seldom get your full asking price in a business sale. If you discount by 15% that lowers the actual sale to $1,912,500. From this number you deduct taxes. Most of the sale will be taxed as ordinary income at approximately 40% leaving approximately $1,147,500 of taxed and available funds. From the remaining amount deduct any debt the company carriers for equipment, lines of credit, or other non real estate debt to get to your final number of discretionary funds available to the seller from the business sale to carry you into retirement. There’s your million-dollar retirement nest egg. Bottom line – to end up with $1 million in the bank you need to start with a business valued at $2,250,000. To get to this you must generate at least $3 million in revenue and capture a net profit of no less than 20%. There you have it. That is what you need to achieve in order to retire well. Now, what will it take for you to close the gap on where you are and where you need to get too? You need 3 good years with each one showing at least marginal growth year-over-year to retire well. "What’s next," you ask?  Determining how you are you going to do it?

Reference: 9 Month Coaching Plan – The Retirement Achiever – Maximize Your Business Sale and Cross Over into Retirement with Financial Security