Monday 26 September 2016

How Much is My Restoration Company Worth?

Posted by at 9:55 AM in

Determining a reasonable value for your restoration business is not hard to do. Simply take the 3-year average of your net profit and add back seller’s discretionary expenses such as salary, benefits, auto allowance, etc., and you are just about there. Next you need to identify your multiplier.

Franchise companies use a discounted multiplier. That’s right – the potential sales price for franchises is reduced because they have less control over their businesses, more intrusion from the franchisor, and there is the never ending 10% royalty fee due on all products and services. This combination of factors leads to a lower company value.

A well run franchise is likely to use a multiplier of 2.5 while a well-run independent earns a multiplier of 3. So let’s do the math. Let’s multiply the 3-year average plus seller’s discretionary expenses by the multiplier of 3 and you have a reasonable value for your business. This could be the asking price if you intend to sell. But before you get too excited there is more you need to know. Your business will likely not sell at its full price and you will have to pay taxes on the majority of the sale. You will likely discount the asking price by 10% – 15% and the majority of your sale proceeds will be taxed as ordinary income at around 40%.

Now reduce the initial business value by any debt for non real estate obligations such as business loans, lines of credit, leases, etc., along with the discounted amount for the sale, and taxes and you have a final value of what you can expect to pocket from the sale of your business if the sale occurred today. So let’s consider this scenario. The typical small restoration business does about $750,000 in annual sales and has a year-end net profit of around 15%. This net profit produces approximately $112,500. Add back salary and other owner relates expenses at approximately $75,000 and round up to $200,000. Multiply this by 3 for a value of $600,000.

Take out taxes and some debt expense and you are likely to have around $300,000 remaining. Can you retire on $300,000 or less if you have to discount the asking price? I guess a person could retire on just about any amount – but would you want to retire on $300,000? Probably not!

If you are a franchise owner, you are likely worse off. If you are looking ahead at retirement you can see that the average restoration company owner is ill-prepared to retire on what they have built their business to be. They need more so they need to build their business more. To retire with $1 million from the sale of your business you need to achieve $3 million in sales and a 20% year-end net profit.

How do you go from where you are to where you want to be? You need to answer this question and then do it. Once the present value and the future results are clearly in mind you can build a pathway between them. This you must do if you want to retire well. How much time do you have to accomplish this? Reference: 9 Month Coaching Plan – The Business Transformer – Double, Even Triple Your Business in 18 – 24 Months