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Ep #046: Why The Value of Your Business is Critical to Your Financial Plan Thumbnail

Ep #046: Why The Value of Your Business is Critical to Your Financial Plan

Listen in as I discuss the key challenges small business owners face when planning for retirement, succession planning, or contemplating a business exit. Understanding how much your business is worth will be critical in establishing a successful financial plan and facilitating a seamless transition or exit strategy.

We provide Financial Advice to Small Business Owners navigating Business Succession. Transition, Exit, or Grow your business without stress or uncertainty.


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Episode Transcription


For many business owners, their biggest asset will be the enterprise value of their business. There’s a statistic by the Exit Planning Institute that states most business owners have north of 80% of their net worth tied up in their business. And today I wanted to discuss how the value of your business fit into your financial plan. Because many businesses out there if they were to go to market today, they wouldn’t sell. This becomes a real problem if you have the majority of your net worth in an asset that is illiquid and can’t be turned into cash. 

The problem with not knowing the value of your business

Now this may be you listening and I don’t want to leave you with just problems but also provide solutions on what you can do about this, so stick with me. Because here’s the honest truth, many businesses are not attractive enough for sale, and where this becomes a real problem is when there aren’t enough investable assets or income-producing assets outside of the business that can provide a sufficient income stream when you want to retire or stop working. So selling your business and using the proceeds to help fund the next phase of your life becomes a necessity. This can add a ton of stress and uncertainty to your life. And many don’t realize this until they are forced to sell and exit the business, because of an unexpected life event, many don’t find this out until it’s too late and they are in their late 60s or 70s and finally want out… but they can’t get out, because they need the cashflow from the business.

This is why for owners, understanding the value, is critical to having a successful financial plan because in most cases it can determine the success rate of your retirement, it can determine whether you can retire when you want to or not, it can determine what type of lifestyle you can afford in the next phase of your life. If you don’t have enough assets saved up outside of the business and your business cannot be sold, or it cannot be sold for enough money, you’ll need to work longer in the business to do one of two things.

  • Save and invest outside of the business until you have enough to meet your income needs.
  • Or increase the value and attractiveness of your company to hopefully sell and fund your lifestyle.

In many cases, an owner will need to do both. 

Understanding your business value is also important to access capital and do effective estate and tax planning. Part of a financial plan is not only clarifying your cashflow before and after a sale but factoring in taxes and making sure the Net proceeds will be enough for you. The math on selling a business includes capital gains taxes, Additional Medicare taxes, transaction fees, professional advisor fees, and sometimes a dollar amount you’d want to give back to your employees. After all, you want to ensure that what’s left over is enough for you and your family to live on. 

So with all that said, what can you do about it? 

Tips on what you can do

First and foremost get educated on these topics so you become familiar with the terminology and basic concepts. Look at more of the episodes on my podcast Business Exit Success, there are 46 episodes and everything is about successfully transitioning and exiting a business. There is also a youtube channel also called Business Exit Success, so if you prefer to watch content, hop over there and subscribe to receive updates when new videos get uploaded. If you research I’m sure there are many other free resources out there, just make sure you are learning from professionals actually certified in this space and doing the work. 

Once you feel educated enough, next is simply getting a financial plan and business assessment to understand where you are at, and what you can be doing to achieve your long-term business and personal goals. Again, doing this on your own is a great start, tons of free education out there, but there are also certified professionals that can help. We do this all day every day for business owners, but the point is to go get something done with a professional somewhere. And I realize there are lots of people competing for your time and resources, but in my experience for your and your family’s future, the amount of time you put into building your business, don’t risk all that by not having a plan. Get educated, and go make a plan.