Business owners work hard for their money, and selling their business may be something they rarely think about. Then one day they mention to you that they just heard about someone in a related industry who sold their business for some astounding sum. They wonder if maybe this is something they should think about.
For the advisor, this is the time to listen. Maybe this indicates a hot spot in the industry and a time to capitalize on value. Tell your clients that it’s time for them to check it out.
Business owners often have no idea what their company is worth. As an advisor, if you try to list the value of the business ownership asset, you may quickly see how uncertain it really is. If you press the owner with the question of likely value, they may puff up and tell you, “Since Joe got $50 million for his company, I would probably get $100 million!” Or, if it’s been on their mind, maybe they had a valuation done by their CPA firm a few years ago. Without real market insight, neither hearsay rumors of other transaction values, nor careful mathematic tallies of the present value of cash flows, will give much insight about value. The object is to determine fair market value, salable today, which can become cash for the owners tomorrow.
Our firm has worked with dozens of astute and intuitive investment advisors who have given us the opportunity to quadruple (and more) their investment basis for key business owner clients. Sometimes those owners have only modest investment principal at the outset because they have grown accustomed to not counting that piece of their net worth as mobile. They treat it as if it’s off-limits for any potential liquidity.
We worked with a firm some years ago in Memphis whose owner contemplated sale because the business was doing well, was 65 years old and because his second-in-command son astutely said, “The market is huge right now. It’s time for us to consider it.” The owner did have a nice personal investment account started, with about $4 million tucked away from many years of hard work. Together we agreed that we needed to get at least $30 million for the company to be in range of fair value for sale. There were some magnificent competitive forces in play, and the timing was ideal. We got $67 million – all cash – for that company. Our investment advisor friend turned a nice $4 million investment account into about $60 million after tax. He was a happy advisor!