The share market has been a rollercoaster ride for investors in recent times. Triple digit wins followed by even larger losses have left the average investor reeling. A good reminder that markets always move in both directions.
Valuations of privately owned businesses have also been somewhat turbulent of late. Average offers to buy private businesses were 4.2 pre-tax profits in the first quarter of 2015, but dropped to 3.9 in the second quarter.
Does this mean you have missed the opportunity to sell your business at the peak?
Maybe. But should you care? Probably not.
The thing many of us forget is that when you sell your business—possibly your largest asset and in the biggest wealth-creating event of your life—you have to do something with the money you make.
Despite the recent share market volatility, that means you'll have to turn around and invest your sale proceeds into asset classes such as shares or property, both of which have improved significantly since the depths of the GFC in 2009.
Who Is Richer: Samantha or Scott?
Indulge me in a hypothetical example. Let's look at two imaginary business owners, Samantha and Scott, each running a business generating a pre-tax profit of $500,000.
Putting everything else aside, let's imagine Samantha sold her business for three times her pre-tax profits at the low point of the GFC back in 2009. She would have walked with $1.5 million pre-tax to invest in the share market, property or other assets.
Now let's imagine Scott decided to try and time the market. Scott waited out the GFC and sold his business recently for four times pre-tax profits, walking away with $2 million before deal costs.
At first glance, Scott looks like the winner because he sold at the peak and got four times profits instead of Samantha's three times. But when we take a closer look, Samantha would probably be better off today.
Assuming Samantha had invested her $1.5 million well in shares or property, she would now have much more than Scott, who waited and sold his business at the "peak”. She would also have had a number of years without the stress of running her business.
Timing the sale of your business solely on the basis of external markets is often a zero-sum game, because unless you're going to hide the proceeds of a sale under your mattress, you're probably buying into exactly the same market conditions from which you're selling out.
A better approach is to optimize your business against the eight things buyers look for when they buy a business, regardless of what’s happening in the economy overall.
Find out how you score on the eight factors that drive your business’s value by completing the free Value Builder questionnaire here.