Work Out What the Sale Has to Produce Before You Ask What the Company Is Worth

Most owners have a sense of what their company is worth and a sense of what they need, and they have never put the two numbers on the same page. Do that first. The distance between them tells you whether the next three years are about timing, about work, or about rethinking the plan.

Start from your life, not your company

Work it backward. Start with what your life after the sale costs: what you spend, what you still owe, the people you support, and how many years you expect to fund. Subtract what you already hold outside the business. What is left is what this transaction has to produce after everything is paid.

That is a different question from “what is my company worth,” and very few owners have answered it. For most of them the business is not one asset among several. It is the plan, and the sale is the only event that turns it into money.

The headline price is not the number

Four things sit between the price in the press release and the money that reaches you. All four can be estimated years in advance.

Debt. Everything the company owes comes off the top, including the items owners stop noticing: equipment lines, shareholder loans, and anything the company has deferred.

Fees. Advisory, legal, accounting, and the quality-of-earnings work a buyer will expect. These are a cash cost at closing. What it actually costs to have somebody sell your company covers how they are usually calculated.

Tax. It depends on how the deal is structured, your entity, and your state, and the difference between two structures at the same price can be large. Same price, different money explains why.

What arrives later, or not at all. Escrow, a seller note, an earnout, or equity you roll into the buyer’s company. None of it is in your account on closing day, and some of it never will be. See an earnout is not a price and being paid in paper.

A worked example

Illustrative. Kwame owns an IT staffing firm. He believes the company would sell for about $9 million. He has never worked the other direction.

When he does, the stack looks like this. About $1.1 million of debt comes off the top. Fees and closing costs take a few hundred thousand more. His accountant’s rough model of the tax on the likely structure takes a large share of what is left. And a buyer in his market will probably hold back part of the price in escrow and put another part in an earnout tied to next year’s placements.

The cash that reaches Kwame at closing is closer to half the headline than to the whole of it. His plan needs roughly $6 million in hand. At today’s value, the deal does not do what he built the company to do.

That is not bad news. It is news that arrived three years early, which is the only time it is useful.

Three places you can land

Put the two numbers side by side and you are in one of three places.

The gap is already closed. The company as it stands produces what you need. The question becomes when, and to whom, and the work is protecting a position that a lost customer or a departing manager could still undo.

The gap can be closed. The distance is real, and operating improvements over three years can reach it. This is where most owners sit. The order of the work matters more than the effort, because some improvements take longer to show up in the numbers than others.

The gap cannot be closed in three years. This is the one owners avoid naming, and naming it early is worth the most, because every real answer needs time:

• Take more time. Five years reaches further than three.
• Change who the buyer is. A buyer for whom your customers, licenses, or location are worth more than your earnings may close a gap that a cash flow buyer never will. That is not the same as planning on the premium; it is finding out early whether such a buyer exists.
• Revisit the number you need, with your own advisers.
• Sell part of it now and the rest later. A minority sale takes some risk off the table and gives the remaining stake a second chance at a higher number, as you do not have to sell all of it explains.

What does not work is finding out at the letter of intent. None of those four answers is available to an owner who is already in a sale.

Why this comes before everything else

Every improvement you could make to the company is only useful once you know how far the number has to move. An owner who has done this exercise picks the improvements that close the gap. An owner who has not does the easy ones, runs out of time, and goes to market having improved the parts of the business that were already fine.

Write both numbers down. The distance between them is the brief for the next three years.

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This is what we do. Prism Edge builds both numbers with you: a defensible view of what the company is worth today, and what the sale has to put in your hands after debt, fees, tax, and anything deferred. Then we build the three-year plan around the gap between them.

The full chapter on the gap, including one owner whose problem turned out to be a calendar rather than a company, is in Enhancing Your Business Value, free to download here.

General information, not legal, tax, or financial advice, and no advisor relationship is created by reading it. Rules change and the specifics of your situation matter. Always consult your own attorney and accountant before acting.