A frequent question I get from clients that want to sell their business is “What can I expect to net from selling my business?” That’s a good question, but a better question might be “What cash flow can I expect from what I net from selling my business?”
To be blunt, if you are interested in cash flow it never pays to sell your business. Rather, the better strategy is to work until you drop. If you hold out long enough you might run the business into the ground but on the whole, you would have netted the most money. So, if money is your motive, do not sell. If, however, you feel it is time to get out of the business and start a new phase of your life then money should not be the driving motive other than receiving a reasonable price for your business.
Regardless of what you decide and do, here is a model of what to expect from selling your business.
Assumptions (you can apply any amounts you feel applicable for you):
| Business Net Income | $1,000,000 |
| Business Selling Price (5 x net income) | 5,000,000 |
| Selling Costs and Taxes on Sale (40%) | -2,000,000 |
| Net Proceeds | 3,000,000 |
| Amount Used for Buying Spree (You Decide Amount) | -300,000 |
| Available to Invest to Earn Annual Income | 2,700,000 |
| Expected Annual Income (3%) | $81,000 |
The conclusion here is that you’ve exchanged your business and $1,000,000 annual income for $300,000 of goodies, $2,700,000 in investments and $81,000 annual income. If your motive is money, how does this make sense?
However, there are myriad other reasons for selling and if one of those is the reason, then by all means, sell. The only caveat I post here is that you should make sure your cash flow needs will be fully met without having to invade any principal.
It’s complicated, but so is life. My advice here is to be absolutely sure you want to sell and if your motive is retiring, have your spouse, partner or children (as the case might be) on board with your decision, and to make sure you are secure with cash flow. A large amount of assets is great to have, but you live off of the cash flow and not the asset values.
If you have any business or financial issues you want to discuss please do not hesitate to contact me at [email protected].
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