You may recall that in my previous blogs, I mentioned that most small and medium business owners were depending on the sale of their business to fund their retirement.

I also pointed out that most small and medium business owners don't know what their business is worth and many tend to overestimate its value!

Consequently, many will end up not having the funds they need to retire and be financially independent.

You need to plan to stay on track for your retirement

If you don’t plan for business succession, there is a possibility that you might have to postpone your retirement! That’s why it’s so important to have your solid and robust succession plan in place so you can avoid the pitfalls many business owners fall into. It’s not quite as hard as you might think.

The most common basis for valuing small and medium businesses is to use a multiple your business’ future maintainable earnings (FME).

This is where it gets complicated

Your Future Maintainable Earnings is unlikely to be the profit that is shown on your financial statements and tax returns.

The multiple applied to ‘Future Maintainable Earnings’ is often referred to as the capitalization rate.

The multiple or capitalization rate can depend on industry ‘rules of thumb’ as well the risks specific to the industry or an individual business and sentiment of the market… for example is it a buyers’ or a sellers’ market?

Generally, the multiples range between 1 and 5 with most sitting comfortably between 2 and 3.

So what should you take away from all of this?

To improve the value of your business you need to focus on the two things you can control.

These two things are: 

1. Increasing future maintainable earnings of your business as this will increase the value of your business.
2. Reducing the risks associated with your business. This will help you to increase the multiple or capitalization rate which in turn increases the value of your business.

What next?

Now you realise just how complex this all is, maybe it’s time to come in for a chat.  Give Jenny a call on 07 4972 5177 and we can set up an obligation free meeting to talk about succession planning.