Most people start planning for retirement years before they are ready to retire. If you’re starting the process with your financial advisor, your business plays a very big role in your plan. 

Financial advisors tell us they need a few critical pieces of information from clients to start a plan. One is how far off retirement is – do you have a specific year in mind? The next is how much you think you want to earn in retirement. For most business owners, it’s equal to the salary they’ve drawn from the company over the past few years. Your financial advisor has a formula for projecting that annual number into the total assets you’ll need to retire. 

Kendall Park, a respected financial advisor at Raymond James, takes his clients through this exercise. 

“Let’s say that number is $225,000 a year. To be able to earn $225,000, you’ll need about $4.5 million in assets (based on an estimate of 5% withdrawal from your account per year.)  If you want to retire early, that asset number will be higher.”

He continues, “Your financial advisor needs to know how much you already have saved for retirement. You might have other investments, but your business will probably be the most important and largest part of your net worth. And in my experience, most owners don’t truly know what their business is worth.” 

There are good reasons for that. While they’re busy running the business, most owners are focused on the trees and not the forest. They know how much they bring in and spend every month, but they don’t have the time (or expertise) to estimate the company’s total value. 

If they do have an idea, it’s usually based on what someone else’s business sold for. “If his company sold for $2 million last year, mine should go for about the same.” Brokers will tell you that’s not a good measure of what yours might be worth. There’s a lot more that goes into valuation.

Some owners will get the number based on a buyer’s offer. “I’ll give you $2 million for your business today” sounds like a valid estimate of value until you realize that a buyer’s job is to obtain a company for the lowest number possible. They’re not on your side. The only way to get a true picture of your company’s value is to have more than one offer from more than one serious buyer. 

Some owners come in with a nice round number they’ve made up themselves. But wishful thinking is not the best formula to use.

Coming into a planning meeting without a clear picture of your biggest asset’s worth makes it harder to create a realistic strategy. Financial planners have ways of estimating value and can give you a broad range based on comparable data. But it’s usually a wide range since they don’t know your company well and are not valuation experts.

That’s why I recommend you go to an experienced business broker for an opinion of value before you start thinking about retiring and selling the business. A broker has no conflict of interest or agenda; we simply do the research to give you a clear picture of your company’s worth. We can also advise you on how to raise the value of your business when you get ready to sell.

Knowing your company’s value allows you to plan with more confidence. You and your financial planner can decide how many more years you’ll need to work based on your assets, your spending, and your goals; you’ll also understand how your tax status will affect your actual earnings from the sale. 

We offer a complimentary opinion of value by looking at comparable company sales and also the Sellers Discretionary Income (SDE).  To get your report, click here.