Whether you’re the owner, or an employee, chances are you don’t know how much the business is worth. And, chances are everyone thinks the business is worth more than it really is. This misunderstanding makes it difficult for the owner to to plan for retirement, and even harder to keep good employees.
At this point you might be saying to yourself that you get how it affects the owner’s retirement plans, but how could not knowing the value of the business make it harder to keep good employees?
One of the biggest problems service companies have is keeping their top performing employees. After a few years of experience, many employees decide to leave to start their own businesses. They do this for many valid reasons, but the one that is most often sited is that they want to be recognized and rewarded for their contributions to the company. The obvious route to this goal is to become the boss, and make all that money that comes with owning the business.
For most, it’s not until they’ve been in business for themselves for a couple of years that they realize that being the boss is not as much fun as they thought. But, they can keep telling themselves that at least they’re building up value in the company that will pay off in the end.
So, just what don’t they know about selling their small business? What employee’s don’t see is the actual value of the business and the business selling process.
Let’s take a look at a current on line listing for a 3 1/2 employee, 17 year old Plumbing company in Wisconsin. They had gross sales last year of $630,000 and Cash Flow (Annual Profit + Annual Payments to owners) of $100,000. The owner wants to retire but is willing to work part time for the new owner. The owner is also willing to finance the sale. The sale includes $140,000 in equipment and inventory. The asking price is $189,000.
So, after 17 years in business, the owner will sell his business for $49,000 after paying for the Equipment and inventory. Plus, he’ll lend you the money to make the purchase. This usually means that he is having a hard time making the sale at the asking price.
This is just one example that you can find on line. Some companies will sell for a much higher profit, but many will not sell at all. Some owners end up selling their inventory and client lists for pennies on the dollar. One current rule of thumb company value is a bit over two times cash flow depending on the market. So the seller can hope for about two years of profit plus salary as the value of the company.
This is the big payoff that many business owners count on for retirement? This is why top employees leave successful businesses to start their own companies?
These cold hard numbers are a warning to business owners and employees alike. If you are an employee thinking about striking out on your own, know that you probably won’t retire on the value of the company. Running your own business has its rewards and headaches, but building equity is a long shot.
If you are a business owner, know that you need to pay yourself enough every year to save for retirement. You also need to be open with your employees about the business. Employees who know the general outlines of the your business’ financials may be less likely to strike out on their own. This can save you the cost of finding and training new, high quality employees.
Crunching your numbers will pay off long before you try to sell the business and retire. You can build your retirement and your employee’s retirement into your every day numbers.