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The Value Of Your Business

Have you recently assessed how much of your personal wealth is reliant ?

Initially, when you launched your business, its financial worth was likely minimal. For most entrepreneurs who start from scratch rather than buying or inheriting an established company, the business holds little value at the outset. However, as time progresses, the portion of your wealth tied to your business likely increases significantly.

Consider a theoretical business owner named Robert, who at the age of 30, starts his own company. At this point, Robert owns a modest amount of equity in his Tampa, FL house and a nascent retirement account. Initially, his business held no monetary value and therefore did not contribute to his net worth.

By age 55, Robert’s home equity has climbed to $650,000, his retirement savings have expanded to $500,000. Over the years his business has flourished. He recently got a full business valuation and chatted  with a Certified Business Intermediary (CBI) or Business Broker who valued the business at $4,250,000 to $4,500,000.At this stage, his business constitutes 80% of his net worth.

Robert adheres to the primary rule of investing—diversification—within his retirement portfolio. Yet, despite his precautions, he hasn’t managed to diversify his overall assets effectively due to the overwhelming success of his business.

Moreover, Robert might have surpassed the stage where the net proceeds from selling his business (after taxes and expenses) would allow him to live comfortably for the remainder of his life. This point varies based on individual lifestyle, but surpassing it should prompt a reconsideration of the risks involved.

The recent pandemic underscored the uncertainty of business, illustrating how quickly a prosperous business can face hardships. When the majority of your net worth is tied up in a business, and selling it could fund your retirement, continuing ownership might pose unnecessary risks. While the excitement and social aspects of business may be fulfilling, the financial risk might not be justifiable.

Upon reaching the the time he is ready to ease up from running the business full time and considering diversification while continuing to work, here are some options:

  • Sell a Minority Stake: Through minority recapitalization, you can sell less than half your shares, usually to a financial investor like a private equity group. This option lets you diversify your wealth while maintaining control over your business.
  • Sell a Majority Stake: In majority recapitalization, selling over half your shares typically means the new investor will want you to stay on and manage the business for an extended period. This strategy allows you to diversify your assets while retaining some ownership and continuing to lead your business.\
  • Earn-Out: Selling your business might involve an earn-out, where you agree to operate your business as a division within the buyer’s larger company for a set time. Earn-out periods can range from one to seven years, with three years being common. If you foresee stepping down within three to five years, an earn-out might be a practical choice.

Building a successful business is immensely rewarding, but when it leads to an unbalanced personal financial situation, it’s wise to evaluate the risks you’re carrying and the opportunities to alleviate some of that burden.

Lastly:

At our firm, we engage with a wide array of professional advisors, ranging from accountants, attorneys, and lawyers to wealth managers and business coaches. Our extensive network also includes past business sellers, enhancing our capability to offer nuanced insights and services. For individuals seeking to deepen their expertise or pivot their career paths, we provide specialized training for those interested in becoming a business broker or advancing in the field of commercial real estate.

You might be wondering, “How do I sell commercial real estate?” or “How do I price a business for sale?” These are common queries we address daily. Whether you’re contemplating selling your business or simply exploring the realm of commercial property, our platform, www.LegacyAOL.com, offers comprehensive details and guidance.

For those questioning whether to join a franchise like TransWorld, Sunbelt Business Brokers, FirstChoice Business Brokers, MURPHY BUSINESS Brokers, or VR Business Brokers, it’s important to consider the unique benefits and challenges each option presents. We can help clarify the value of choices versus joining a private firm or starting your own. We cab assist in evaluating the best path forward, tailored to your individual goals and circumstance