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At 47 years old thinking of selling my business for 1 million
Old 11-15-2017, 08:35 AM   #1
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At 47 years old thinking of selling my business for 1 million

Just had the business I own valuated at around 1.2 million. Trying to decide if I should sell. Just curious what folks here think and what they could do with 1 million in a lump sum.

It's my only income right now, and I've mostly been reinvesting profit to grow the business these past 3 years. My wife works. We both have 401k. She about 800k, me about 500k.

2 kids, 9 and 5 years old. 440k left on the home mortgage.

I'm not under any illusions I would be done with work. I fully plan to start up a new business immediately and already have something going with a partner. But that will take a bit of time to grow and nothing is guaranteed.

My question is what can I do with a million? Pay off the house, invest in an index fund and use some to fund the new business is the best I can come up with.

Other option I suppose is hold on to the business, pull more profit out and still try to grow it. Risk there is things can slow down and the valuation goes way down if that happens.
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Old 11-15-2017, 08:43 AM   #2
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I'd guess it must be earning $250,000+ annually with that valuation. If so,
I'd keep riding that pony because you'll have a hard time replacing that much income/profit with index funds. If you are burned out and not tending to the business, I'd give you a different answer.
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Old 11-15-2017, 08:53 AM   #3
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Are you working 60-80 hours at owning your own business?

You could sell, beef up your taxable investments and then work part-time or full time in a less stressful career.

If you are currently working 40-50 hours and like the work, then I would keep it going for a few more years.

Trading 40-50 hours of high pay for 40-50 hours of lower pay isn't all that appealing when you get right down to it.

Once you get to 52 or so, then that $1 million could allow you to get from 52 to 59.5.

It really always comes down to annual spending. Get a good hold on what that would look like under different scenarios.
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Old 11-15-2017, 09:18 AM   #4
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I'm in a similar spot business wise, with a $1m+ valuation (online with $250k+ profits)

For me, it seems easier to keep it running than ready it for sale. Also, the valuation seems incredibly low to me, and 3x profit multiple.

I'm in a much better shape financially though, with enough to retire fully anytime.

For you, it really depends on how much work you put in and where you see the business going.
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Old 11-15-2017, 09:18 AM   #5
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Depending upon your business, some buyers will want you to stay on the job for a few years, and the actual payment is structured over the years.

This is to prevent you from selling them a pile of junk, and riding off into the distance with their $1M.
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Old 11-15-2017, 09:23 AM   #6
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Great input thank you.

Yes profit is around 250k plus per year. Much of that goes into growing the business. New products and keeping in front of inventory. So it's not like I'm pulling 250k out a year. Although I could if I was just in maintain mode and not growth.

As far as the hours, it's probably an hour a day to keep things running. The bulk of the work is growing it, learning more, keeping on top of things in the ecommerce space.

The only real stress is the fear that it will all go away overnight. Not sure if that's super common among business owners but it seems like it is!

I only invested about 15k total in this business 2 and a half years ago. So obviously it's a huge return. On the other hand, it's still growing and doing well.

I think the real question I need to answer is do I think I can keep it going. The answer is yes, but it's still stressful to make that bet.
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Old 11-15-2017, 09:51 AM   #7
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Don't forget that if you sell for $1 million that you'll have a lot less after paying federal (and perhaps state) income taxes on the gain.... it sounds like your basis is probably pretty low so most of the sales proceeds would be gain.

Also, a lot depends on how much you spend and need to maintain your lifestyle. If your living expenses are $50k a year then you could probably sell and retire.... if $150k a year then no way.... in between then perhaps... wht your wife earns is another factor.

Another question is if you did sell, what would you do and how much would that take in?

Sounds to me like you have a pretty good situation and there is no need to sell the golden goose... you enjoy what you do and it is very lucrative.
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Old 11-15-2017, 10:00 AM   #8
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Originally Posted by RDamien View Post
I'm not under any illusions I would be done with work. I fully plan to start up a new business immediately and already have something going with a partner. But that will take a bit of time to grow and nothing is guaranteed.
Here is your key. If you sell this business you will need to replace it. That will take time and you have no idea what the outcome will be or how many attempts it will take to possibly (and possibly not) replicate your current success.

Why not just keep what you have?

Many years ago my accountant told me that the most common mistake he saw clients make was believing that they could easily replicate their first success.

Personally (and I made my money through owning my own business), I wouldn't worry about future valuation; I would concentrate on the fact that you have a valuable asset in hand and make the absolute most of it.
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Old 11-15-2017, 10:14 AM   #9
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hi,

i guess first question would be if it can be sold or if you are a big part of the business.

[mod edit]

further i think in the next years inflation will go up, (simply to inflate away the big government debts) if that happens its better to have something concrete opposite than cash in the bank.
so money in the bank with low interest will be bad, a business or real estate will be better since you can up prices with inflation.

On paying of the house, i suppose that depends on your view of inflation (above) and what % you pay. if your mortgage is 4% and you can earn 8% on investing, don't pay of the house...
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At 47 years old thinking of selling my business for 1 million
Old 11-15-2017, 02:20 PM   #10
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At 47 years old thinking of selling my business for 1 million

I sell businesses and yes, market valuations (which are around 3x annual profit) are very low if you anticipate that the earnings you see today are an annuity. The reality unfortunately is that many businesses lose a lot of value upon sale and the new owner doesnít get the same kind of earnings the old owner did. Furthermore, personal businesses tend to be extremely volatile where exogenous shocks can literally wipe out 100% of profits. I definitely do not think youíd be able to replace $250k of income by selling the business, but I will comment that Iíve seen more business buyers this year than in the eight years Iíve been selling businesses, and banks are competing left and right currently to give SBA loans to buyers. That opens the door to many more buyers. If / when the SBA loses their appetite for these kind of loans (likely after a bunch of the loans go bad) then I anticipate the pool of buyers will shrink significantly. So IF youíre going to sell, Iíd start the process sooner rather than later.
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Old 11-15-2017, 06:20 PM   #11
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hi,

i guess first question would be if it can be sold or if you are a big part of the business.

[mod edit]

further i think in the next years inflation will go up, (simply to inflate away the big government debts) if that happens its better to have something concrete opposite than cash in the bank.
so money in the bank with low interest will be bad, a business or real estate will be better since you can up prices with inflation.

On paying of the house, i suppose that depends on your view of inflation (above) and what % you pay. if your mortgage is 4% and you can earn 8% on investing, don't pay of the house...
Hey there 2Black, yes definitely can sell it. There are a number of these sorts of physical products ecommerce businesses being bought and sold farily regularly. I'm pretty confident I can get it done. The broker is certainly optimistic.

And yes great point on the house, mortgage is under 4%. But where do you see 8% returns? Real Estate? I'm more of a hands off investor. Market indexes and such are more my speed, although I've been actively looking at real estate as an income property.
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Old 11-15-2017, 06:23 PM   #12
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I sell businesses and yes, market valuations (which are around 3x annual profit) are very low if you anticipate that the earnings you see today are an annuity. The reality unfortunately is that many businesses lose a lot of value upon sale and the new owner doesnít get the same kind of earnings the old owner did. Furthermore, personal businesses tend to be extremely volatile where exogenous shocks can literally wipe out 100% of profits. I definitely do not think youíd be able to replace $250k of income by selling the business, but I will comment that Iíve seen more business buyers this year than in the eight years Iíve been selling businesses, and banks are competing left and right currently to give SBA loans to buyers. That opens the door to many more buyers. If / when the SBA loses their appetite for these kind of loans (likely after a bunch of the loans go bad) then I anticipate the pool of buyers will shrink significantly. So IF youíre going to sell, Iíd start the process sooner rather than later.
Hey Reno, yeah the fact that so many of these businesses are being snapped up says to me it's a good investment for them because of the low valuation. I also agree that new owners would probably run it into the ground, although the particular business model is really easy to keep running.

The original plan, and I think the one I'm going with...

Do NOT sell yet. Build it up for the next 3-6 months, and start/grow another business concurrently. Then I can decide based on the results.

I still stress about missing a window, but such is life.
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Old 11-16-2017, 07:28 AM   #13
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From what I read here: don't sell.

A valuation below 15x net profit in 'going concern' means you are handing over an asset that is yielding 7%+ a year, and swapping it for a new business. Why?

Yes, stuff can implode over night but that is true for almost all businesses. Even so, what is the downside vs. upside: how will it impact your life if the company goes to zero, vs. stable vs. x5.

Other questions I have: what is the real risk? what will the future owners do with the business?

For example, if they are going to consolidate it into a bigger company and then sell it off for a higher multiple, you can swap part of your equity for a stake in that bigger company.
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Old 11-16-2017, 08:19 AM   #14
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My business went down in profits over the last 3 years due to severe market forces. But I anticipated it might. I didn't sell at it's high even though I could get a job and make a comfortable living without the business.

I did take the profits and invest. So at the end the profits did not fully equal what the sale price would have been at that time.

What I learned was business sales people are always optimistic when they are trying to list your business. I mean what are they going to say. "no we can't sell it"

If you are making 250K plus in profit then you can just save that over a few years and equal the sale price. That's how they would pay you if you sell it. Out of your own profits. And, you would have to keep working to build your new business so you would eat into those profits from the sale unless you got a job and worked for someone.

I think you have grass is greener syndrome or are getting burned out or bored with the current business.
I know when I was thinking about it I had both of the above. Still kinda do.

In my opinion the only reason to sell your business is if it's worth significantly more (like 10x) or if you are getting ready to retire or just cant do it any longer (sick of being the boss etc.).

You did say that you are putting most of the profits back into the business. So in my opinion it's not really profits. Also, your business is only 2.5 years old. Those other business ideas you are working on can potentially be integrated into your current platform. But if they can't then you are taking time away from your current business and that will hurt your business.
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Old 11-17-2017, 11:24 AM   #15
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Hey Reno, yeah the fact that so many of these businesses are being snapped up says to me it's a good investment for them because of the low valuation. I also agree that new owners would probably run it into the ground, although the particular business model is really easy to keep running.

The original plan, and I think the one I'm going with...

Do NOT sell yet. Build it up for the next 3-6 months, and start/grow another business concurrently. Then I can decide based on the results.

I still stress about missing a window, but such is life.
Hi RDamien. The buyers for these businesses tend to be more savvy than you'd expect, and it's not a slam dunk to sell the business. (And it sounds like someone quoted you 4x for the value...from what I've seen it's usually closer to 3x, often a little below that, for ecommerce. Be wary...there are tons of newly minted brokers, and there's a trend for them to over-quote the expected sales price in order to get business in the door.) Anyway, I wonder if you'd do even better to just keep it for 18 - 24 months? You'll earn 1/2 to 2/3 of what you'd likely recoup in a sale today, and that way when you do sell, it really won't matter that much if the market is still hopping or not, because there will definitely be SOME price at which it'll sell quickly even in a downturn. (During the last downturn, there were fewer businesses for sale, but we still found market-clearing prices for the ones that came up.) As many have pointed out, you're not going to find another asset with a rate of return high enough to justify the income you're giving up, so I usually suggest people run the business til they're simply done, i.e. the b.s. bucket gets full enough that they're more concerned with being done than with getting a return on sale that makes economic sense. Otherwise, you can pull your hair out for a long time pondering why the market pays so much less for your business than more business owners feel it's inherently worth.

Also, regarding those valuations, you can get higher valuations if you're willing to share the risk with the buyer (i.e. half the money down, half based on future performance) but in a heartbeat I'd opt for an all cash or mostly cash deal at a lower price. As mentioned, too many of these businesses don't do well under new ownership, so I wouldn't want to tie my payout to someone else's performance no matter how impressive their growth plan sounds.

For what it's worth, I personally had a business that generated nice annual seven figure cash flow with almost no work. The one time I had a chance to sell, I was ignorant of the market values and named a price way too high. The buyer balked, and three months later my business collapsed at the beginning of the Great Recession. One of the reasons I started helping others sell was to try to give a realistic sense of the market so they could make more informed, educated decisions than I did. The sad reality is that multiples for small businesses are pretty low and not at all correlated with what we see in public markets.
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