A Brighter Way
A Brighter Way
Everyone likes to maximize the value and annual return on their investments. Investors hire the best investment advisor they can find to monitor their marketable securities. Few business owners, however, manage their most important asset with that same commitment.
Closely held business owners get into the trenches, handling the day-to-day responsibilities. As a result, they often don't have a realistic idea of the worth of their business or the type of return they are achieving.
Just like a stock portfolio, a business requires tending to create greater wealth. Most investors pay a fee of about 1 percent of their portfolio value to an investment advisor to track their assets. Investing a similar percentage of the value of your business into tools and expertise to grow its value should be just as important. Typically 50 to 70 percent of a business owner's net worth is tied up in the business. Developing this investor mindset has helped some business owners double the value of their businesses.
The business investment mindset should start with a business valuation -- determining what the business is worth. And just as investors receive quarterly or annual statements on their stocks and bonds, you should repeat the valuation annually to track changes in the investment.
The business valuation becomes an important part of the company's strategic planning. It allows you to make better decisions about your future, such as gifting stock or selling the business, by being proactive, rather than reactive.
Once you know the true value, take steps to increase the return and make the company more valuable.
The top three drivers of business value are the rate of return required by investor (based on the risk of the investment), sustainable growth and cash flow.
Although not required of privately held companies, professionally prepared financial statements (audit or review) can also help maximize the business investment. The statements let you measure the business against generally accepted reporting practices and lowers the risk through the eyes of an investor. Professionally prepared statements make the business more attractive when looking for financing or potential buyers and can also compare the business against benchmarks in the industry.
Review the company's buy-sell agreement and your "what happens if a key player gets hit by a bus" plan. Your will and testament ensures what will happen if you die or become incapacitated. Review it annually and update it with the current value of the business as well as any changes in the situations of shareholders. And if the company purchased life insurance policies for key shareholders to fund the agreements, verify the amount of insurance needed to satisfy the agreement exists in the policies and adjust if needed.
The business investment strategy should include an exit plan for leaving the business. This can hinge on your personal financial and estate planning efforts. The annual business valuation can help determine realistic goals for personal financial plans. And with current lower business values, it may be important to look at gifting options to maximize tax benefits.
Succession planning can be complicated. It involves the your goals and the goals of family members and other key personnel, mixed in with the realities of family dynamics and the business situation. It's a discussion that must take place so the business can continue to successfully function. There may be multiple options for an exit from the business, so enter discussions with an open mind. Depending on the situation, you might choose to gift the business to family, sell it to ESOP or to a strategic buyer.
You can begin to develop an investment mindset by deciding to treat your business as the investment it is and allocate funds to manage the investment. Begin the process by working with a valuation professional who is experienced in succession planning and mergers and acquisitions.
Demographics project a mass exodus of baby boomers leaving their businesses in the coming years. Many will be trying to sell their life's investment to a limited number of buyers. Competition for these buyers' dollars will be fierce. Increasing the value of your business will help you be poised for this buying frenzy, which is expected to occur once the economy rebounds.
Although it may not look like stocks and bonds, a business owner's money, time and passion are tied up in their largest asset. Why not take steps to maximize the return and get the most from all you've invested?
This article was originally published in Columbus CEO, November 2010.
Note: This content is accurate as of the published date above and is subject to change. Please seek professional advice before acting on any matter contained in this article.
