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What's Wrong with Just Milking It

The "Just Milk It Theory"

If you have considered selling your business of late, you may have been disappointed to see the offers a business like yours would garner from would-be acquirers.

The latest analysis of 60,000+ business owners who have used The Value Builder System shows that the average offer made by acquirers is just 3.7 times your pre-tax profit. Companies with less than a million dollars in revenue have significantly lower multiples, and larger businesses get close to five times their pre-tax profits. Regardless of size, private company multiples are still significantly lower than those reserved for public companies.

Considering the paltry offer multiples, you may be tempted to hang on to your business and "milk it" for decades. You might think if you hold onto your business for four or five more years, you could still own 100% of it and still receive the same amount in dividends as you would from a sale.

You may receive more tax benefits from the sale proceeds of your business than you would by paying yourself handsomely using the Just Milk It Strategy.

In theory, the “Just Milk It Strategy” is sound on the surface, but it has some significant risks.

You're the one who takes the risk

You retain all of the risk if you decide not to sell your business. Entrepreneurs tend to be optimistic, but it only takes a memory of 2009 to remember that economic cycles can go both ways. There is a chance that the business climate today will become bumpier in the next five years despite its current condition.

RAM & Hard Drive Space

When you compare your brain to a computer's hard drive, owning a business is like constantly running anti-virus software. Theoretically, you can still own your business and enjoy the occasional round of golf or bicycle ride through Tuscany, but as long as you own the business, it will always consume a large part of your brain (RAM). Family fun, vacations, even the weekend are all tainted by the humming of your brain's operating system while it processes data.

Capital Calls

Let’s say your business generates $500,000 in Earnings Before Interest Taxes, Depreciation and Amortization (EBITDA), and you could sell your company for four times EBITDA or keep it. You may argue it’s better to keep it, pull your profit out in the form of dividends, and capture the same cash in four years as you would by selling it. 

This theory breaks down in capital-intensive businesses where there is usually a big difference between EBITDA and cash in the bank. If you have to buy machines, finance your customers, or stock inventory, a lot of your cash will be locked up in feeding your business and the amount of cash you can pull out of your business each year is a fraction of your EBITDA.

Tax Treatment

You may receive more tax benefits from the sale proceeds of your business than you would by paying yourself handsomely using the Just Milk It Strategy. You may actually have to pay yourself $2 or $3 for every $1 you can net from the advantageous tax treatment of a business sale.

You Can Do Better

Finally, you may be able to attract an offer that is greater than three or four times your pretax profit. Our clients with Value Builder Scores of 80+ get offers that are, on average, 6.1 times their pretax profit. We have even worked with some owners whose multiples exceeded double digits.

If you’d like to get your Value Builder Score, so that you can understand where you currently stand (value-wise), please let us know. We will make arrangements for you to complete the 13-minute questionnaire.

Thank you for your time & attention!

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The information contained in this article is general in nature and is not legal, tax or financial advice. For information regarding your particular situation, contact an attorney or a tax or financial advisor. The information in this newsletter is provided with the understanding that it does not render legal, accounting, tax or financial advice. In specific cases, clients should consult their legal, accounting, tax or financial advisor. This article is not intended to give advice or to represent our firm as being qualified to give advice in all areas of professional services. Exit Planning is a discipline that typically requires the collaboration of multiple professional advisors. To the extent that our firm does not have the expertise required on a particular matter, we will always work closely with you to help you gain access to the resources and professional advice that you need.

Any examples provided are hypothetical and for illustrative purposes only. Examples include fictitious names and do not represent any particular person or entity

This is an article originally published by The Value Builder System, and presented to you by our firm. We appreciate your interest.