About 15 years ago, I was called in to evaluate a construction company, and help them create an estate plan. They already had 3 business evaluations completed, and all of them came in at around $30 million. Danny, who was 60 years old, advised that he really would like to step out of the business, and neither of his two children wanted to run it either. I gathered the information, and then obtained permission to share it with a well-versed CPA and estate planning firm. We all worked closely with his own CPA, and designed a plan to sell it in 3 to 5 years. Three years later, Danny sold it to one of the largest construction companies in Oklahoma for $100 million.
Why was the final valuation so different than the first 3? As business owners, we pay a lot of taxes; therefore, it is important that we design our plans to be tax-efficient so that we pay the least amount of required taxes each year. In addition, if you are planning the sale of a business, it is important to document the best cash flow and profit, which is what we helped Danny do.
Think of it this way. I’m currently working with a business owner who is wanting to buy another business for $10 million. My first question to Tom was, how quickly should the business pay for itself? He immediately responded with “3 years”. My next question was, what is the net profit each year? Tom quickly responded, “$1 million”. We were at lunch, so I just took another bite and waited. Tom immediately did the math in his head and smiled. Tom then stated, “if I pay $10 million for it, and it’s only netting $1 million a year, then that’s a 10-year break-even point”. I simply nodded, and Tom immediately realized that the asking price was most likely more than it was worth. These are the things that have to be evaluated closely, and why I specialize in helping business owners like yourself make wise, very well planned out decisions.