TLDR
- Work backwards. Your FI number is your yearly spending divided by a withdrawal rate. Subtract what you already have invested. What’s left is the gap the sale has to fill.
- A sale doesn’t land its headline price. After earn-out risk, fees and tax, many owners keep somewhere between 60% and 80% of it.
- So the headline price needs to be roughly 1.3 to 1.6 times the gap.
- Then check whether your profit and a realistic multiple can get there. The multiple depends mostly on how well the business runs without you.
Most owners ask this the wrong way round. They ask what the business is worth, then hope the number is enough. The question that decides your date runs the other way: how much has to land in your account, and what does the business have to sell for to put it there?
I sold a business in 2014. Part of the price came as cash. Part didn’t, and that’s the part I’d negotiate differently today: I’d only take what pays out in cash within a set number of years, not something locked up waiting for an event that may never come. The other thing it taught me: buyers pay for a business that runs without you. Mine could, and that’s most of why it was worth more than a solo practice.
Step 1: the number the sale has to fill
Your FI number is what you spend in a year, divided by the withdrawal rate you trust. At 4%, that’s spending times 25. At 3.5%, about 28.6.
Say your household spends $8,000 a month. That’s $96,000 a year. At 4%, your number is $2.4 million. You already have $400,000 invested. The gap the sale has to fill is $2.0 million.
If your mortgage ends in a few years, take it out of the forever number first. Most owners overstate the gap by doing this step lazily.
Step 2: what a sale actually lands
A headline price is a promise. What lands is the promise minus four things.
- Cash at close. Often 60% to 80% of the price. This is the only part that’s certain.
- The rest. Paid later as an earn-out if the business hits targets after you’ve handed it over, or paid in shares or anything else that isn’t cash. Count it at a discount, because you no longer control whether it turns into money, or when.
- Fees. Broker, lawyers, accountants. Commonly 5% to 10% of the price on a small business.
- Tax. From zero to a large slice, depending on where you live and how the deal is structured. Ask your own adviser; I can’t tell you yours.
Worked through on a $1 million headline, with 70% cash, a 30% earn-out you rate as a coin flip, and 8% in fees:
| Line | No tax on the sale | 20% tax on the sale |
|---|---|---|
| Cash at close (70%) | $700,000 | $700,000 |
| Earn-out (30%, counted at 50%) | $150,000 | $150,000 |
| Fees (8%) | −$80,000 | −$80,000 |
| Tax | $0 | −$154,000 |
| What lands | $770,000 (77%) | $616,000 (62%) |
Call that your keep rate. In this example it’s between 62% and 77%.
Step 3: the price you need
Divide the gap by the keep rate.
$2.0 million ÷ 0.77 is about $2.6 million. At the 62% keep rate, it’s about $3.25 million.
That’s the shortcut: the headline price needs to be roughly 1.3 to 1.6 times the gap. If anyone quotes you a sale price that only just covers your number, it doesn’t.
Step 4: can your business get there?
Small service businesses often sell for something like two to five times the owner’s yearly profit. Where you land in that range depends mostly on one thing: how much of the business is you.
To sell for $2.6 million at 3 times profit, the business has to make about $870,000 a year for its owner. At 2 times, $1.3 million. If it can’t run for two weeks without you, a buyer knocks a big slice off the multiple before you even start. That’s the part most owners can still change, and it’s the one that moves the price the most. I’ve written the whole ladder out here.
The sale doesn’t fund your freedom. The part that lands does.
What if the numbers don’t reach?
Three levers, in the order I’d pull them. Make the business run without you, which raises the multiple and the cash-at-close share at the same time. Keep it longer and let it pay you, if it runs without you, because then its profit counts toward your number without a sale at all. Or lower the number itself, honestly, line by line.
Selling isn’t the only way out. It’s one way of turning a business into money that pays you whether or not you work.
Run your own
Open the calculator and pick the second door, “I already own one”. Put in your profit, your multiple, your cash and earn-out split, your fees and your tax. It shows what lands, and your date whether you walk away now or stick it out.
I’m not a licensed adviser. These are illustrative numbers and my own experience. Your tax, your deal structure and your multiple are questions for the people you pay to answer them.