There's a moment I've seen play out in a lot of owners' lives. They've had a fantastic run, years of strong income, and they finally ask what the company is worth. The answer comes back lower than they expected, sometimes a lot lower. It feels like a mistake. Usually it isn't. It's the business value vs income problem: two scorecards that measure different things, and most owners have only been keeping one of them.
I'm Dan Delaney, Founder & CEO of Seek & Find Financial. I help owners in Northwest Indiana and the Chicago area connect what their company earns with what it's actually worth, and with what they'll need once they're done running it. Let me walk you through a story that shows why those numbers drift apart.
Investing involves risk, including possible loss of principal. No investment strategy can ensure financial success or guarantee against losses. Past performance may not be used to predict future results. Provided content is for overview and informational purposes only, reflect the opinions of the author, and is not intended and should not be relied upon as individualized tax, legal, fiduciary, or investment advice.
This information is being provided only as a general source of information. These views may change as market or other conditions change. This information is not intended and should not be used to provide financial advice and does not address or account for an individual’s circumstances. Past performance does not guarantee future results and no forecast should be considered a guarantee. Please seek the guidance of a financial professional regarding your particular financial concerns.
Investment advisory services offered by duly registered individuals through Seek & Find Financial LLC, a Registered Investment Adviser. Licensed Insurance Professional.
A dental group with a great year
Imagine a dental group with five offices across Porter and Lake counties. Around $13 million in collections. The founding dentist is 58, still practicing three days a week, and takes home a very healthy income between his own production and the group's profits. By any income measure, he's done everything right.
Then a dental support organization reaches out with interest. He's flattered and curious. He's heard about what groups like his have sold for, and he has a number in his head. When the offer comes, it's well below that number. And it comes with strings: he'd need to keep practicing full time for five years, with part of the price tied to future results.
His first reaction is that the buyer is lowballing him. His second, a few weeks later, is a better question: what are they seeing that I'm not?
Two scorecards for the same company
In Walking to Destiny, Christopher Snider's chapter on Changing Your Paradigm describes the shift from income to value. It's a simple idea that's hard to live by. Income is what the business pays you while you're in it. Value is what someone else will pay to own what's left when you step away.
The income statement rewards things like:
- High personal production from the owner
- Low overhead, sometimes because the owner does several jobs himself
- Strong cash flow this year
- Tax-efficient owner compensation and perks
The valuation rewards a different list:
- Revenue that doesn't depend on any one person, especially the seller
- A team that will stay after the sale
- Patients, or customers, who are loyal to the practice rather than one provider
- Systems, data and reporting a new owner can run with
- Growth a buyer can believe in
Notice how little overlap there is. You can max out the first list and barely touch the second.
Where business value vs income pulls apart
Back to our dentist. When he looks at his group through the buyer's scorecard, the picture changes fast. About a third of total production comes from his own chair. Two of the five offices have no associate who's been there more than eighteen months. Hygiene recall runs on each office manager's personal system. And his long-time patients book with him, not with the practice.
His income is real. But a lot of it walks out the door the day he stops practicing, and the buyer knows it. That's why the offer is lower and why it asks him to stay. The buyer isn't paying for his past income. They're paying for future income they can count on without him.
The wealth that gets stuck
This is where the gap stops being a business issue and becomes a personal one. Owners like our dentist often have most of their net worth tied up in the company. If the value is lower than they assumed, or can only be unlocked by working five more years, the retirement they pictured moves further away.
I've written more about this in the wealth trapped in your business, but the short version is this: a high income can mask how concentrated and illiquid your wealth really is. Building assets outside the company, steadily and on purpose, is what gives you room to choose your timing.
How the story turns
Let's say our dentist decides not to take the offer. Not out of pride, but because he now understands what would raise the value, and he has time. Over the next three years he focuses on the buyer's scorecard:
- He recruits and mentors two associates with a real path to long-term roles, and gradually shifts his own patients to them.
- He standardizes hygiene recall and scheduling across all five offices so they run on the same system.
- He brings in a practice administrator who owns reporting, so performance can be seen by office and by provider.
- He cuts his own clinical days from three to one, and watches how the numbers respond.
- He works with his CPA and a financial advisor to steadily build savings outside the practice.
His personal income might dip a little during those years. His valuation story gets much stronger. When buyers come back, the conversation is about a group that runs on its people and systems, not on its founder.
Every situation is different, and nobody can promise a particular outcome. But the shift in focus, from what the company pays him to what it's worth without him, is what gives him real choices. Our business owner financial planning guide covers how that outside-the-business wealth fits into the larger plan.
What this gap means for your family
If your family's lifestyle runs on your income, they're relying on you to keep producing. That's a lot of weight on one person. A company with real transferable value gives them something sturdier: an asset that could be sold, or kept with good people running it, if you couldn't continue.
It's also worth asking whether your spouse knows the difference between what you earn and what the business is worth. Many don't. Sharing that picture now can prevent a painful surprise later.
Frequently asked questions
Why would a buyer pay less than my income suggests?
Because buyers price the income they expect to keep after you leave. If part of your profit depends on your personal work, relationships or reputation, they'll discount it, ask you to stay through a transition, or tie part of the price to future performance.
Is it worth lowering my income to raise the value?
Sometimes a temporary dip makes sense, for example, while you invest in leadership or step back from production. It's a trade-off that should be weighed against your personal finances and taxes, so talk it through with your CPA and advisor first.
How often should I check what my company might be worth?
Many owners benefit from a realistic value check every year or two, even with no sale in sight. It turns value into a scorecard you can actually manage, instead of a number you discover at the worst possible moment.
Keep score on all three legs
Business value is only one leg of the stool. The other two are your personal and financial readiness for life after the business, and a real plan for what that life will look like. If you'd like to see where each leg stands, I'll do a private, one-on-one Three-Legs Check with you. Send the word "STOOL" through our contact page to get started, or simply reply STOOL if you're reading this in The Long View. We serve owners of companies valued at roughly $10 million to $20 million, usually ages 45 to 70, from Valparaiso and Chesterton to the wider Northwest Indiana and Chicago area.
Investing involves risk, including possible loss of principal. No investment strategy can ensure financial success or guarantee against losses. Past performance may not be used to predict future results. Provided content is for overview and informational purposes only, reflect the opinions of the author, and is not intended and should not be relied upon as individualized tax, legal, fiduciary, or investment advice.
This information is being provided only as a general source of information. These views may change as market or other conditions change. This information is not intended and should not be used to provide financial advice and does not address or account for an individual’s circumstances. Past performance does not guarantee future results and no forecast should be considered a guarantee. Please seek the guidance of a financial professional regarding your particular financial concerns.
Investment advisory services offered by duly registered individuals through Seek & Find Financial LLC, a Registered Investment Adviser. Licensed Insurance Professional.
