Testing the Value Gap

If it is so simple, why do so few business owners do it? Instead, they value their businesses by hearsay, miss their lifestyle needs by a substantial margin, and think “I’ll be fine.” In fact, fewer than one in five owners has even documented a plan for their transition.

Let’s look at an example of a typical owner. Joe owns Coastal Construction. Joe pays himself $120,000 a year and lives nicely on that amount. So, he estimates that $10,000 a month should cover his lifestyle in retirement. To generate income that covers that, he needs $3,000,000 in savings with a 4% return. That means he has to sell his business for about $4,000,000 (assuming 24% in capital gains).  His company did $7,000,000 in revenue last year, with a $500,000 pre-tax bottom line, so he is sure it’s worth at least $4,000,000.

But wait a minute. Is Joe really making $120,000 a year? He drives a company truck that cost $85,000. The payment is about $1,500 a month. His insurance, maintenance and fuel are paid for by the company. Coastal Construction also pays for Bob’s $750 a month health insurance, his $1,200 month life insurance, and his $7,200 annual personal tax preparation bill.