According to The Millionaire Next Door, "self-employed business owners are four times more likely to be millionaires than those who work for others" if their business is profitable and they're frugal.
Of millionaires who own businesses, 21% of their wealth is in their business.
For non-millionaires business owners, I'd bet it's a much larger percentage.
With so much wealth tied up in your business, making sure that wealth is available when you retire, is part of a successful retirement.
Because retirement means you aren't working, you'll either have to sell your business or get it to the point where it works without you.
For most business owners, retirement means selling.
Selling a business is best anticipated over several years.
During this time you'll be able to arrange the business and operations to maximize the return you get from your business.
Like any good marketer, to maximize return you have to know the needs of your buyer.
There are two types of business buyers - investment and strategic.
Investment buyers purchase based on the money generated by the business.
For a strategic buyer, though, the business has to have something more than the money - customer base, special technology or capabilities, etc.
For example, if a printing company wanted to grow into a new market, it could try selling directly to that market.
But sales would be limited by experience and knowledge of the players and customer needs.
If, instead, it bought another printer already serving the market, it would acquire a customer base, experienced sales force and reputation.
The purchased business would be worth a lot to this buyer because, in addition to the money from the existing operations, it could grow its current business and cut costs from the purchased business.
This buyer would be a strategic buyer.
Most small businesses are bought by investment buyers.
Investment buyers look primarily at the money coming from the business to determine value.
Cash flow is king for these buyers.
Unlike public companies, small business owners want to reduce net income as low as possible to reduce taxes.
They'll typically increase discretionary business expenses.
For example, the owner might take extra buying or marketing trips each year, or purchase a top tier insurance plan.
Discretionary expenses and expenses that don't require cash (e.
g.
, depreciation) are added to the net profit to show the owner benefit over a three to five year period.
Then, owner benefit is multiplied by between ½ and 5 (the most common being about 2.
4) to arrive at the business value.
The number used depends on a number of factors, including time in business, consistency of cash flow, competition and business location.
To get the maximum price, you have to plan in advance.
First, compete only on customer service and serve customers in a well defined niche.
Your customers should be people you like, care about and who return again and again.
This will increase profitability, goodwill and consistency of cash flow Next, watch your recast profitability constantly.
Analyze every decision based on profitability.
If you invest into the business, make sure you know when you'll receive cash flow from that investment.
Be sure profit will grow.
Keep the business clean - physically and financially.
Buyers equate a clean business with a well run business, and vice-versa.
Systematize the business.
If the business requires you to run it, it will be much less valuable to all buyers.
Finally, price the business reasonably.
We don't have a negotiation culture in the U.
S.
If something is seen as overpriced, most people won't make offers.
So, if your business is overpriced, you won't receive many offers.
Then, after you've been sitting without offers, you'll get a below market offer which you'll be more inclined to take.
Planning now can increase the value of your business for your retirement plan.