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MiMfg Magazine
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August 2019
In This Economy?
Holding vs. Selling Your Business
By Vincent Mastrovito • Prometis Partners
Business owners commonly think that their
businesses are worth more than their actual market
value. This is because they do not try to think like
buyers, often until it’s too late. According to surveys
of 20,000 business owners by the Value Builder
System, the average offer is only 3.7 times the
pre-tax profit of the business. The value of the
company for sale makes a difference, of course.
Larger companies may get closer to 5 times the
pre-tax profit while companies valued at less than
$1M garner significantly lower multiples. Regardless
of size, though, offers for private companies are less
than for public ones.
Some owners, when faced with those projections,
decide it’s better for them not to sell but instead
remain with their companies and extract what value
they can from them over time. Within five years,
that amount might equal what they could get from a
sale. This is what is referred to as a “milk it”
strategy. It seems safer — money now and perhaps
more money later when they sell — but there are
some downsides. These are:
• Business is good now...but will it stay good?
The economy is in solid shape right now, and
that means that many businesses are making a
good profit. The Great Recession isn’t that far in
the rear view mirror, however. If there is another
recession, not only will the yearly profits be less,
but there will be a much smaller pool of buyers if
you do decide to sell. The financial risk lies
entirely with the owner — whether that’s you or
someone else.
• The company owns the owner’s focus and
energy. Unless you have built a company that
can operate entirely independently of you — and
few owners do this — your time and energy will
be taken with the running of the business. Every
emergency will require your attention and
resources. Other priorities like family, developing
new skills or hobbies, or travel will have to wait.
• Locked-in capital isn’t yours to keep or spend.
Capital-intensive businesses require a lot of
feeding in order to keep going. Owners who are
counting on yearly dividends from profits to
make it worthwhile should do the math to make
sure those dividends are worth the risk and cost
of maintaining ownership.
• The tax burden on a sale may be smaller than
yearly taxes on profits. This will depend on the
tax jurisdiction — which is why it’s always wise
to involve a tax professional when considering a
sale either now or down the line.
• A profitable, well managed business may be
worth more than 3.7 times the pre-tax profit.
Business owners who think like buyers in
advance and address weaknesses in their
companies often attract very lucrative offers
with multiples into the double digits. This is
particularly true in a seller’s market like the
one we are in now.
The economy is strong at present, and the
market for companies favors owners. This means
that taking a “milk it” strategy could be risky,
especially for business owners who are ready for a
different focus or new opportunities in life. Before
the next recession comes, it would be wise to
consider all options, including selling your company
sooner rather than later.
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Vincent Mastrovito is president of Prometis Partners.
He may be reached at [email protected]
or 616-622-3070.
Prometis Partners is an MMA Premium Member and
has been an MMA member since September 2018.
Visit online: www.prometispartners.com.