By Sean Sullivan
Billy Joe and Bobbie Sue have spent most of lives building their business, Miller Enterprises (an S Corporation), but weren’t necessarily ready to sell. Now it’s caught the eye of a private equity firm, which has made an unsolicited offer of $25 million—a multiple of 10x Miller Enterprises’ current EBITDA of $2.5 million.
If they move forward, the couple will receive $20.0 million in cash up front, while rolling $5.0 million tax-free into the NewCo. The private equity firm expects to resell the company in five years, at a target price valuing the rolled equity at $10.0 million. However, at first glance, Billy Joe and Bobbie Sue are wary of selling.
Should I Sell My Business Now?
While skeptical, Billy Joe and Bobbie Sue engaged their Bernstein advisor and CPA upon receiving the offer. To help them better understand what it could mean, we analyzed the difference between selling today versus in the future.
After years of hard work, the couple recently started taking distributions of $600,000 per year. Combined with their salary of $400,000 per year, these distributions generate $1.0 million of income. This is more than enough to support their lifestyle spending of $300,000 per year, and as a result, have allowed the pair to accumulate $2.0 million in savings. Assuming the couple keeps taking these distributions, they can expect to add about $300,000 per year to their portfolio aft er paying income taxes and covering their living expenses.
Using Bernstein’s Wealth Forecasting Analysis, we projected their existing liquid assets of $2.0 million — with the annual $300,000 top-up — would ultimately grow to $6.9 million in 10 years (Display) assuming a 50% global stock and 50% bond allocation. While this seems like a sizable amount, how does it compare to selling the company?
Here, the answer greatly depends on how their company performs after the sale. As a reminder, while the company was valued at $25.0 million, Billy Joe and Bobbie Sue would only receive $20.0 million up front, or $15.0 million after taxes. The remaining $5.0 million would be equity in NewCo. If we take an ultra-conservative view and assume the pair sells today—but never monetizes the rolled equity—we’d expect their portfolio to be worth $21.0 million in 10 years net of income taxes and annual spending.
Based on their conversations with the private equity group, Billie Joe and Bobbie Sue considered this pessimistic. They asked to see a more “realistic” analysis reflecting their interest doubling to $10.0 million—or at least retaining the $5 million they’d rolled in. If this came to fruition, we projected their portfolio would be worth $25.4 million (no growth) or $29.6 million (upside case) at the end of 10 years.
In Search of Breakeven
Now that we have an idea of what their assets could be worth under various sale scenarios, we know what a future sale must look like for a small business owner like Billy Joe and Bobbie Sue to break even (Display).
If Billy Joe and Bobbie Sue believe the company is well enough positioned to at least recoup their rolled equity, they’re in a good spot, based on the data we analyzed. In other words, they would essentially need the exact same valuation ($24.7 million) that they received today to break even in 10 years.
Time to Sell?
At today’s valuation, the couple could go either way. But what if Billy Joe and Bobbie Sue could command a higher valuation down the road by growing their EBITDA? If they could expand this figure from $2.5 million to $3.5 million—and the market was still willing to offer a 10x multiple in the future—they could exit at a $35.0 million valuation. This price would place them comfortably above the breakeven numbers.
Yet, holding out for another 10 years exposes Billy Joe and Bobbie Sue to the vagaries (and risks) of managing their business over a longer period. If a future buyer is not willing to pay the same multiple even with EBITDA growth, they may not be better off by waiting to sell.
It’s always challenging to find the “right” financial decision when selling your business. But by going through this thought exercise, business owners like Billy Joe and Bobbie Sue quantified some of the risks and rewards that might arise from continuing to run their business. In the end, solid advice allowed them to make an informed decision about whether to “take the money and run.”
Sean is an Associate Director in Bernstein’s Investment & Wealth Strategies Group where he focuses on developing analytics to assist business owners throughout the deal process. In addition, Sean produces original research on investment and planning opportunities for high-net-worth families.