This is part 2 of my 5 part series on selling your company. The first installment, How Much is My Company Worth is here.
The two big troubles with anyone selling their company is 1) the Value Gap and 2) your company has not been prepped for sale. Today, we try to better understand the value gap and answer the question: How much money do I need for retirement?
There are two parts to the value gap: 1) ego and 2) what you need/want in retirement. 100% of the time, you will be disappointed on the price a third party values your company. That is because this is “your baby.” It’s what you have shed blood, sweat and tears for. Unfortunately, you cannot set the price someone will pay for your company. Only the buyer does this. You need to fight to keep your ego out of this process. What you need is much more important than what you think your company is with.
And what you need is where the good financial advisor enters the game. I have a good friend that works for Morgan Stanley. They have software that will take inputs from you and then tell you how much you need to retire in the manner you want. The interview process will drill down into the individual items that define that life style. Here are some of the questions:
- What are your annual mortgage, real estate tax and insurance costs?
- How many cars do you need? What is a typical purchase price?
- How much do you spend on vacations each year?
- What is your monthly restaurant budget?
- Do you want to gift money to your kids? How much?
- What are your annual medical costs? Do you have health insurance? Long term care insurance?
You get the idea – the financial advisor wants to know how you plan to live. From there, the software will calculate how much you need today to maintain this life style. If you want two $50,000 cars and you trade them in every two years, you need $400,000. If you spend $1,000/month at restaurants, you need $200,000. You want at least $2 million in your estate, you need $750,000 today. (These numbers are examples, only.)
Based on all of this, the software calculates that you need approximately $4.5 million dollars. What a great tool for you – now there is some logic to how much you need to sell your company for. You have greatly reduced the uncertainty of what lifestyle you will lead and you have a minimum target sales price for your company and have begun to answer the question: How much money do I need for retirement?
What you are hoping for is the investment banker tells you that you should net $8.0 million from the sale of your company. However, If he says you will net $3.0 million, you have a decision to make. Do I cut back on my retirement lifestyle or do I wait to sell and build my company up to the $4.5 million I need? Neither choice is the best – it’s all about you and your needs. By going through this process, you have brought some logic and rational thinking to one of the largest decisions you will ever make.
If you plan to sell your company in the next 5-7 years, it is time to start planning today. You really want to get to your financial advisor and have him do these calculations for you. And if your advisor does not have the tools, let me know and I will put you in front of someone that can.