Hindsight can prompt people to doubt choices

Question: : I am a small business owner. One day I would like to sell my business. What do I need to be thinking about now? How do I go about determining what my business is worth?

Answer: Do you really own a small business, or do you simply own your job?

Neither situation is necessarily better than the other, as we are all created differently. Some of us have the talent, temperament and training to be owners of small businesses. Others of us have characteristics better suited to "owning" our own jobs. Still others of us are best as employees of others.

You own a small business if it meets two tests: profitability and replaceability.

After you take your own salary out of the picture, does the business still have a profit (after all necessary expenses have been paid) of at least 10%?

And are you (the owner) replaceable to the business, insofar as your function? If you are not replaceable, who would want to buy the business from you?

If you do not meet these two tests, you simply own your job. You are self-employed, but you do not have a marketable business to sell.

Be ruthless in your assessment: do you own a business or do you simply own your job?

If you own your job, pursuing thoughts of one day selling your job to someone else is like dinosaurs mating - there's no future in it.

OK, let's suppose you've had this ruthless and honest conversation with yourself and determined that you do indeed own a business (large or small) and have something you could one day sell.

If so, the second thing you need to realize is: every business buys itself out.

If Joe sells his business to Bob for $1,000,000, Bob is going to have to earn (somewhere, somehow) about $1,500,000 to pay for it. That's because (in most cases) you can't pay for a business with pre-tax dollars. So Bob has to earn $1,500,000, pay income taxes, end up with $1,000,000 and buy out Joe.

Of course, that's rarely what happens, is it? Either Bob goes down to the bank to borrow the money. Or Bob talks Joe into being the bank.

Joe agrees to sell Bob his business and allow Bob to pay him for it out of the proceeds of the business. Keep in mind that none of this is deductible, and so we're back to Bob having to earn $1,500,000 with the business he now owns, pay taxes on it and give Joe the $1,000,000 over time.

Guess what? Most small business owners who sell their small businesses do not get near the value they believe they should. There is often no way to make it a "win-win" transaction. Since the seller is usually the one in a hurry, he often ends up with the short end of the stick.

Moral? Don't wait until the end of your career to begin extracting value from your small business. Don't coddle it, baby it and let it get away with underperformance.

After all, who is working for whom here? Too often, a review of a company's financials would seem to indicate that the owner is working for the small business, rather than the other way around.

Don't spend everything your business makes and call it "re-investing in the business." Each year, take something out for yourself (is 10% too much to ask?) and let the business buy you out - at least partially.

Don't wait to the end to try to extract full value from your small business. Start the process now...while you're still on friendly terms with the owner.