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.
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