When is the Right Time to Exit?
By Darren Cherry, CEPA
While several factors go into the timing decision, few carry the significance of financial security. For most owners, determining financial security has a few moving parts, including estimated proceeds from the business sale.
Top Mistakes Made in Determining Financial Security
- Blind Faith: in some cases, since the business has provided a more than comfortable lifestyle, little thought is given to the post-ownership stage.
- Frugal Retirement: many fall prey to the notion that they will suddenly spend significantly less post-retirement, which is rarely the case.
- Back of the Napkin: often, the funding needed to retire is based on a crude estimate at a point in time.
- Golf Course Multiple: too often, the value is over-estimated using different transaction economics. (e.g. using the 10x EBITDA multiple of a $500 million business on your $5 million firm)
- Club Dues: another common mishap is to use the gross selling price before taxes and transaction expenses in the calculation.
One of the deliverables of a well-prepared exit plan is a robust calculation of the owner’s wealth gap. The wealth gap is the forecasted shortfall the owner may have between the funds needed to retire compared to their current investments and business value.