This article are provided for information purposes only, and are not intended as legal advice.


What is better to expand your business or keep the status quo if you want to sell your business?

May 4th, 2010

All business owners want to retire with the most money in their bank account so that they do not have to work again.  Many business owners believe that their business is worth more than it actually is or more often that is the amount of that they believe they need to retire on and want their business to sell for that amount.  Unfortunately the value of your business is not what you want it to be or need it to be, it is what the market will bare.

 

A gentlemen many years ago told me his business was worth $1 million because he had one great client that everyone would die for.  That to die for client had been a client for a year and had generated $10,000 of revenue.  The business for sale had revenue at the time of $600,000 make $50,000 in profit but he needed $1 million to retire and believed that someone would pay him the $1 million for his business and to get this one client.  Needless to say, he could not sell the business.

 

Do you try to expand the business to build it to the level that you need to achieve to reach the magic retirement figure or do you do nothing and be happy with whatever your business is worth?  This question will be answered by everyone differently.  If you do nothing, your sales will drop over time unless since your customers are always looking for new products.  Therefore doing nothing will ensure that your business is worth less when you are willing to retire. I know of a company who has not tried to get new customers for 10 years.  They had a very successful business however some of the customers ran into difficult times  and eventually several were sold and left the company.  As a result, sales dropped to the level where this company is now losing money rather than having healthy profits which they had 10 years ago, all because they stopped expanding.

 

If you can try hard for one to two years so that the sales and profitability increases, this will be worth a multiple of that success when you sell the business.  The question is how much effort and cost does it take to get to the next level?   What are the risks, what happens if you spend more but it does not materialize in new sales and new profits, what happens if your three year plan is really five years and you want to retire in five years, you may not see the success of your efforts.  These are all factors which you need to determine prior to you trying to increase sales. You will have to determine the cost of the effort in terms of time and money, will that result in higher sales and profits or what are the risks of this not succeeding?  If it does not succeed, you may need to wait an additional few years to show that those were unusual expenses and not an operating expense therefore have no impact on the selling price.


Filed under: Business strategies — Gary Landa @ 9:52 am


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