My Dad spent the last two years of his life attached to a dialysis machine for four hours three times a week. He literally could not live without it. Some business owners face the same dilemma.
Cindy (not her real name) has a good thing going. Her business is growing at a steady pace, and she’s been able to pocket around $750,000 a year the past several years. We sat down recently to discuss her interest in selling. “I just became a grandmother. My daughter and her husband are going to need more of my time than I can give if I’m still running the company. I’d like to sell it now and live off the proceeds.”
Cindy’s husband had prepared a financial forecast for the business, which included his estimate of value at $13 million. It would take a whole other blog to explain why his estimate was wrong. Suffice it to say, his expectation was high by about $10 million. Yes, I said high by $10 million.
Expecting to retire on $13 million when your business is worth $3 million is a very disappointing place to be. Now, don’t get me wrong, $3 million is a lot of money. I know many business owners who’d love to sell their business for $3 million. But for Cindy and her husband, $3 million is well below their expectation and simply not enough to retire on. Once they pay taxes on the $3 million, they’ll have about $2.25 million to fund their retirement. On a conservative after-tax basis, that means they’d have about $80,000 per year to live on, unless they started eating into the principal. But Cindy has been used to making $750,000 a year. They have high-six figures in a SEP IRA, and she admitted that she could reduce her spending levels somewhat, but not from $750,000 to $80,000. I watched as she turned to her husband and said, “We can’t afford to sell the business.” The sense of disappointment was palpableI’ve seen many situations like this. The owner has an unrealistic sense of the business’s value, causing them to make bad assumptions about their retirement. This problem is a result of the owner not knowing how their business is valued, while assuming that selling the business will fuel their retirement. This can be summed up as a lack of planning and/or planning without quality guidance.
I do not think Cindy and her husband have the energy to take the business to the next level. Frankly, what has to be done to move the $3 million valuation even closer to $13 million might not be doable given her new personal commitments. They are stuck.
In my perfect world, every owner would value their business once a year. Being realistic about what you have and what it can generate after you sell it would eliminate a situation like Cindy’s when the owner is surprised to learn that they literally cannot afford to sell. Being attached to your business is like being attached to a dialysis machine; you cannot afford to be away from it.
Tennessee Valley Group
Latest posts by Tennessee Valley Group (see all)
- Roseanne Roseannadanna Was Right, It’s Always Something - January 5, 2025
