Financial advisors frequently mention the three main pillars of retirement, which are social security, pension plans, and personal savings. Yet, you rarely hear them speak about an asset that may prove to be an individual’s largest asset – their business.
Many business owners invest their money back into their business over the years, especially during the early year, which makes them appear to have minor savings at first. In reality, the returns of investing in a small business can potentially be far greater than any stock market returns. Of course, there are risks as well.
How valuable can a business be? A business can be valued in several ways, such as a multiple of sales, profits, or the value of its assets, and each industry has its own ratios that it relies upon when coming up with a price. For example, if the net profit of a business is $200,000 and sells for 5 times profits, then the valuation would be $1,000,000. A part-time, home-based business may not be worth much at all, but a profitable restaurant, service business, medical practice or other well-managed business can be worth hundreds of thousands to millions of dollars.
Don’t Wait Until It’s Too Late: Selling your business at the right time will have a huge impact upon the selling price. For example, if you are nearing retirement and have health problems, then you may be forced to sell your business at a huge discount if you suddenly are not healthy enough to run the business. Worse yet, if you pass away suddenly, then the value of the business will usually drop even further.
Getting Top Dollar: Ideally, you should prepare for the sale of your business 3 to 5 years ahead of time. This will allow you to be in more control of cleaning up the finances and improving profitability. You will obtain a much higher selling price if your business is doing well and you don’t need to sell it in a hurry.