What I Care About This Week | 2023 July 17

shallow focus photography of lavenders
Photo by Palo Cech on Pexels.com

by Franklin J. Parker, CFA

The Summary

  • Earnings season is in full swing. Last week, we saw earnings from the major banks, and the overall picture was mixed. Banks have begun to set aside more cash for potential loan losses, though not dramatically so. Overall, the S&P 500 is expected to report about 7% lower earnings than a year ago, making this the 3rd quarter in a row of declining profits. This week we see earnings from some more financials, IBM, and Netflix.

  • Big tech has roared back in the first half of this year, and these companies are now collectively trading at 40 times earnings. To put 40x in perspective: for investors to break even via earnings in the next 10-years, these companies would have to maintain a growth rate of 25% every year for the next 10 years. Valuations like that are very difficult to maintain — that isn’t to say they cannot go higher, of course, but it does urge investor caution.

  • Last week’s inflation figures were generally good news, though it did nothing to allay the expectation for another rate hike from the Federal Reserve. This week we see retail sales and industrial production, both important insights into the ongoing health of the economy. Overall, I am still cautious, and investors may do well to hedge away risks they cannot afford to take.

The Details

Should you sell your business, and if so, for how much?

Building a business from nothing takes a lot — lots of sleepless nights, lots of long hours, lots of sacrifice of all kinds. Getting to the point where it is up-and-running, not to mention profitable and big enough to sell, is an accomplishment in itself.

If you are considering cashing out and doing something else (retiring or pursuing another opportunity), there are a couple of things you should consider.

First of all, is your business the type of business someone would buy? I have a very simple test for this: does the business run without you? If it does not, then buyers will scarcer. That isn’t to say there is no value there, of course, but to get the maximum price, you should consider scaling the business so that it more-or-less runs without you.

Second of all, having your books together will be critical. Many business owners neglect this because it doesn’t produce revenue, and they have a good sense of what the numbers are in their heads. However, investors/buyers will want to see it on paper! Getting your books together is a great place to start if you are considering a sale.

Finally, how much do you sell the business for? Most business advisors/brokers can give a good estimate of what someone might pay for your business, but that is only half of the equation. What someone will pay for your business is a very important number to know, of course, but how much you need to net in the transaction is also very important. Understanding whether you can maintain your lifestyle is important, but an understanding of how the sale fits within a financial plan can also help your negotiating position.

A very general rule of thumb to help you: think about the amount of income you’ll need to replace after selling the business. For every $1000/month of income, you’ll need to get about $300,000 in sale price for the business. So, for example, if you need $9,000/month of income to maintain your lifestyle, then you’ll need to get 9 x $300,000 = $2,700,000 for the sale of your business. Again, this is a very very rough rule of thumb, but it is a nice mental shortcut when thinking through scenarios.

Obviously, the more fully you understand your financial plan, the more fully you can understand the requirements for the sale of your business. That is something we are happy to help with!

Chart of the Week

Last week’s inflation figures were very encouraging. Headline inflation has dropped to 3.0%, which is coming within the Federal Reserve’s tolerance. Core inflation, while falling, remained stubbornly high at 4.9%. This was enough to give markets confidence that the Fed would continue with at least one more interest rate hike, likely at its next meeting.

This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be taken as advice or a recommendation for any specific investment product, strategy, plan feature or other purpose in any jurisdiction, nor is it a commitment from Directional Advisors to participate in any of the transactions mentioned herein. Any examples used are generic, hypothetical and for illustration purposes only. This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit, and accounting implications and determine, together with their own financial professionals, if any investment mentioned herein is believed to be appropriate to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yields are not reliable indicators of current and future results.

%d bloggers like this: