A senior estate and financial planning specialist at Sun Life Financial, one of the world’s largest insurance and financial services company, read YBAWS! and had me present business valuation concepts and approaches for his corporate client team. He realized the professional perspective can be different than the street perspective of valuation specifically in terms of FMV versus transaction value.
These financial experts, who have an exceptional understanding of valuation and owner-manager trust and estate issues, benefited from the understanding the impact of de-risking a business for sale bridging any gap between FMV and transaction value.
My experience with the estate and financial planning industry is they collectively have a common question they need to ask their clients but in many situations it is too risky to do so, “Mr. Client, you may think your company will sell for millions, but what happens if you are wrong?” Challenging clients on the value of their company is akin to saying their baby is ugly. Even if it is true, you can’t say anything, you just have to look the other way and hope for the best.
So how do you get to the answer to this important question without asking it? You have to start to ask diagnostic questions to get close to a better expectation of value. I can think of at least 50 questions to ask a business owner to challenge value. Hmmm, “50 Shades of Valuation.” think I am onto something. Bottom line, you want the client to seriously consider what the after-tax cash they expect to get if they had to cash out TODAY NOT IN THE FUTURE. This is very important. If there is a valuation deficit, there is time to fix it.
The approach I take is to challenge, not on the value of the business, but their cash requirement needs upon retirement. If they have not retained a financial services specialist like I presented to at Sun Life, then they have to do so. They have to value every asset in their estate then lastly return to value their business. Hopefully, by that time, they would have found their value expectations were different than the actuals they received, this makes the business valuation conversation easier.
So let's assume after all things considered, the client needs $5 million from their business to meet retirement needs and the lifestyle they desire. They first have to consider there is tax to pay on the sale. It is amazing that some clients think selling a business for $5 million means they get $5 million in their pocket.
What about the fees; legal, accounting, brokerage, marketing? Is this an all cash deal or an earnout? Are there any cash costs required to get the business ready for sale: building repairs, machinery maintenance and upgrade, severance for getting the family off the payroll? There is a lot to talk about here. The next post gets into calculations in detail.
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