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Is Your Business Your Dialysis Machine?

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 $500,000 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 that much. 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. But Cindy has been used to making $500,000 a year. She acknowledged she could reduce her spending levels somewhat, but not from $500,000 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 palpable.

I’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 lack of planning and/or planning without professional 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 because you can’t afford to sell it is like being attached to a dialysis machine, you cannot afford to be away from it.

JIM CUMBEE is President of Tennessee Valley Group, Inc. a retainer-based business brokerage and transition mediation firm in Franklin, TN. Cumbee is an attorney and has an MBA from Harvard Business School. Jim is the author of Home Run, A Pro’s Guide to Selling a Business. .  He has a wide range of corporate and entrepreneurial experiences that make him one of the most sought-after business transition advisors in the state of Tennessee. The principles above are true, but the story, names and fact patterns are changed to preserve the parties’ identities.

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Tennessee Valley Group

Jim is an attorney (non-resident status with the Missouri Bar) and though he no longer practices law, he has read and negotiated enough legal documents to fill a cargo tanker. He has an MBA from Harvard Business School and knows how Wall Street and private equity operates. Jim is a Tennessee Supreme Court Rule 31 listed general civil mediator with tons of experience helping business owners (large and small) work through sensitive problems to achieve winning results. He is the author of "Home Run, A Pro's Guide to Selling Your Business, Seven Principles to Make Your Company Irresistible."

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