Selling to Insiders – How Much Can you Sell your Home Care Business for?

selling your homecare business

You need to define "true cash flow"

If you wish to transfer your business to an insider(e.g. employees, children, co-owners) and want to receive full value, then generally that value cannot exceed four times your true cash flow.  We define “true cash flow” as the pre-tax money distributed to owners via salary, bonuses, company distributions such as S-distributions, and all rental payments exceeding the fair market rental value of business buildings or equipment.  Let’s see how true cash flow determines insider sale price.

Christine Roberts desired to sell her three floral shops to three store managers.  Her total true cash flow was $250,000 per year and she wanted 1.5 million, pre-tax, for the three stores, which grossed approximately 1.5 million total.  Not only did this amount meet her financial exit planning objectives, but one times gross revenue was a fair business valuation.

Even if Christine’s employees want to buy her business, which is a huge assumption we will examine in future posts, let’s look at some reasons why her prospects may be limited.

Her employees cannot afford the payments, which must come from business proceeds, nor can they borrow enough without proper exit planning.  The employees will pay Christine $150,000 per year ($250,000 post-sale cash flow minus 40% combined taxes = $150,000)*.  Not only must Christine pay capital gains on the $150,000, but it will also take her employees TEN years to make full payment.  Would any sane business owner agree to those terms?  And let’s not forget interest.  Assuming a long-term promissory note for 1.5 million at 8%, compounding monthly, and limiting total payments to $150,000, it would take just over ten years to pay!

The bottom line is that true cash flow cannot support Christine’s desired purchase price.  If she lowers her price to $1 million, the timeframe falls to under seven years.  If this is still too long, there are many other exit planning tools that can reduce the time or increase her asking price.  How?  Our mergers and acquisitions advisors at Partners31 can help answer that question, and many others.  Remember that your future cash flow determines, and limits, what your business receives from insider sales.

*Taxes vary depending upon applicable federal and state rates

 

Tags:

About Risa Baker

Risa is Managing Director of PARTNERS 31. Her natural enthusiasm and years of industry experience will successfully guide your business, whatever its size or specialty, through every aspect of exit planning, from strategy to sale.

No comments yet.

Leave a Reply