In the first lesson, we examined understanding why an owner would sell. In this post, I will open the door to the question of valuation: what is my company truly worth? It is helpful to know this information when a potential buyer comes calling.
One of the first things a buyer will do is examine the benefits that the owner is taking from the company. On first glance, many owners look at their salary, or owner draws and insurance, and then stop. In most cases, this is a long way from the true benefits that the owner receives.
Why does a buyer care what benefits the staffing agency gives the owner? You must remember that every benefit that is over and above an amount that would normally be paid to an “employee” is potential earnings that are currently going into the owner’s pocket. It’s important to take a closer look at these benefits because they should become a part of your negotiation arsenal.
From a pure investment perspective, let’s assume there is $50,000 in benefits being pulled from the healthcare staffing company by the owner that would not have to be paid to a new manager, owner, or partner. Where do you think an investor could pick up $50,000 a year as a return on investment? That’s exactly what they will get if they replace you with someone on straight salary, or salary and commission, and that’s just for starters! This must be figured into the sales price.
As a bargaining chip, it is crucial that you strip out all benefits that would not have to be paid to a regular employee. How do you do this? The easiest way is to start with pencil and paper and make a list of all things that you receive that is not received by your employees. You might as well do this before selling because any prudent investor will always do this. I have seen such a wide range of benefits it’s difficult to include them all. I have seen such extravagant benefits taken by owners as to include their “nanny” on the company payroll. I’m not sure how that would be explained in an IRS audit, but who should be and not be on payroll is a definite question during a purchaser’s due diligence. Automobiles, family or otherwise, family insurance coverage, eating out for those questionable “business purposes”, or even redecorating your “home” office could be other benefits.
It is not unusual for potential sellers to take a close look at their “true” benefit from ownership and have second thoughts about their decision to sell. Remember, the potential purchaser is going to look at those items as a benefit as well, this will be their return on investment, and so it’s critical you as a seller look at these benefits in the same manner.