I know there are business owners who want to sell their business but the real question should come down to if they can afford to sell it.  What I mean by “afford” is, after the sale, is there enough after tax money to move on.  Business owners are always asking for the value of their business when they need to be considering how much they need to live on after they sell the business.  This evaluation is a crucial step in determining when and if to sell your business and should be evaluated very early in the process.  Unfortunately, there are too many sales that close and then the seller learns that they have to go back to work to cover their expenses.

In evaluating whether you can afford to sell your business there are a couple of suggestions I would like you to think about.  First, you need to come up with an existing personal budget that you are currently living on.  Some people track… their personal financials on Quicken and others do it manually, either way you need to know what your monthly take home requirements are right now.  Even if you don’t have a monthly budget, write down for three months every dollar that you are personally spending.  If you take out cash, then just write down “cash” on the pad of paper.  The desire here is to determine how much, not what, you are spending your money on.  After three months of tracking expenses, you should have a good idea of how much you are spending.

The next step is to look at your Company books and determine all the personal expenses you’re writing off now and you will have to pick up personally once you leave the Company.  Examples of this are vehicle gas, insurance, repairs, cell phone bills, travel, meals, entertainment, etc.  Basically, any costs that you will have to pay for after you leave the Company.  Add up all these costs and then multiply them by 1.4 in order to determine how much pre-tax income you will need to cover those costs.  For tax burden projections, I’m using 25% Federal and 15% State, so that is how I get to 40%.   As an example, let’s say that you have a friend (not you, since you would never write-off personal expenses) who is spending personally $200/mo on gas and charging it through the Company books.  You will need to make $280 ( $200 x 1.4) in salary/wages or pre-tax income to pay for that personal expense. 

So take your current living requirements and add to it the new personal/business expenses and you will come up with the new family budget.  Look at the monthly requirement and determine if you can afford to sell.  You might have other sources of income, other investments or another business opportunity that can make up the difference, but either way, you at least have a fair and honest way of evaluating if you can afford to sell it.   Take this information and put it in your business tool box and take it out when it comes to evaluating your sale.

This entry was posted on Tuesday, June 9th, 2009 at 2:45 pm and is filed under Sell Your Business, Professional Advice, Exit and Answers. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.