I have encountered many business owners and professionals over the years who, although they had worked hard all their lives, entered retirement without being financially independent. Thus, they are reliant on the government for part of their income needs.
Often the cause is rooted in a belief that their business or practice will be worth a lot more than they actually get for it. Any asset is only worth what someone is prepared to pay for it at the time you want to sell it. The gap between belief and reality can be due to many factors including:
- Not enough interested buyers to make an offer.
- Changed formulas for valuing businesses in the industry. Twenty years ago, financial planning businesses were sometimes sold on five or six times gross revenue. Today it may be only two to three times gross revenue.
- An Ill-informed belief about value. A fitness business owner I met valued his business at three times revenue – this was based on how his financial planner mate was valuing his practice. It is like comparing baked beans with caviar.
Public companies are obliged to re-value their assets regularly and account for changes in values. Other businesses seldom do this as it is costly, takes time and usually serves little purpose. However, if your exit or retirement plan is based on a belief you hold about what your business or practice will be worth in the future you need to test that belief. Home owners can be shocked about the offers they get when they put their house on the market – you might be too. To avoid the value delusion:
- Get an indicative value on its current value. Business brokers and advisory service accountants are good sources to get an opinion of value from.
- Repeat this exercise every couple of years.
- Assume a valuation of ZERO and that anything you get for the business will be a bonus. Plan your financial life around this.
- Make investments outside your business.
- Get advice on asset protection from a competent lawyer before implementing your plan.
- Get advice from your accountant on the optimum tax structure.
- Contribute at the least the maximum permitted concessional (deductible) amount to your superannuation fund (Public offer, Industry or SMSF).
- Get the services of an independent financial planner on superannuation – Remember superannuation is a structure not an investment so you need advice on the options available within the fund.
This process will ensure that you focus on making cash profits over and above what your business needs are.
Your profitable business may then be attractive to purchasers and the delusion of hope is replaced by the certainty of a plan executed.