What Would You Do with an Extra $1 Billion After You Sell Your Company?

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in The Business of Business Finance

Timing will be friend or foe to any small business owner engaged in exit planning or considering a business sale.  But, a recent Wall Street Journal report reminded me that timing for a business sale is a challenge for the big guys as well.

WSJ reported on the first of March that private equity group TPG would be the likely buyer for Styron Plastics, a divisiion of Dow Chemical.  Dig a bit into this story and you'll see a $1 billion timing mistake.

Forecasters expect TPS will pay about $1.5 billion for this business — that's 5 times their pre-tax earnings of $300 million.  The true value of almost any opperating business is a multiple of its EBITDA — usually somewhere between four and six times that net number.

So, let's assume that Dow can sell this business for a 5x multiple. We look back just a few years and realize that Dow reported $500 million of net earnings before price compression and higher materials costs hurt earnings.  If we use the same 5x multiple on $500 million of earnings that generates a price of $2.5 billion, a full $1 billion more than what they're likely to settle for in March 2010.

This is a very valuable lesson for any business owner.  Timing for the sale of your business should not be predicated soley on your personal time table, but taken in consideration of macro economic events as well as micro economics of a potential buyer (much more important).  Poor timing is unlikely to cost you $1 billion, but it very well could impact the quality of your retirement plan.

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