A Critical Mistake Business Owners Make
We find that most business owners focus on profitability and cash flow – but don’t focus on the market value of their business until they begin thinking about retiring or selling their business. That is a big mistake.
Owners need to begin preparing for exiting and selling long before they plan to retire or sell their business to get full value for their business.
Begin With the End in Mind
In Stephen Covey’s The 7 Habits of Highly Effective People book, Habit #2 is to Begin with the End in Mind. Per Covey, Begin with the End in Mind means to begin each day, task, or project with a clear vision of your desired direction and outcome – and then make it happen.
There are three reasons why Begin with the End in Mind should be the watchword for every business owner:
#1 – Every business will be sold or liquidated while the owner is alive or after the owner dies.
#2 – On average, 75% or more of a business owner’s personal wealth is in their business. Since it is their most significant asset, the best way to increase their wealth is to increase the market value of their company.
#3 – All owners will eventually have to take value out of their company for the next stage in their lives.
There are three things business owners should do to make sure they build sufficient value in their business:
Know What Your Business is Worth – Business owners might think they know what their business is worth based on what they hear about other companies in their industry or from friends – but they are usually wrong. Sometimes they think their company is worth more than it really is and other times they undervalue their business because they don’t understand what drives the market value of their business.
Just like having an annual physical – business owners should get an independent valuation of their company every year to know what their company is worth. Tracking enterprise value is the most objective way to determine how well a company is performing – and is also the best way to identify and prioritize steps that could be taken to improve the company’s performance and increase its value.
Establish a Target – Business owners should work with a qualified financial advisor or wealth manager to determine how much wealth they need to create in their business to meet their long-term personal and financial objectives. Having a well-defined company value objective gives the owner a target for building value in their company.
Have a Plan – Even if a business owner does not plan to sell their business, their company may suddenly be for sale because 50% of private company sales and liquidations are triggered by unplanned events – including disability, illness, death, divorce, and other life events. Unplanned ownership transitions or liquidations produce bad outcomes for business owners, their families, and their company.
Business owners need to protect the value of their company – and financial security – by having contingency, succession and ownership transition plans in place. These plans give the business owner a roadmap for:
- Achieving their business and personal goals when they leave their company
- Protecting their and their family’s financial security
- Ensuring the survival of their business
- Controlling how and when they exit their business
Moral of the Story
Building and protecting the value of their business is kind of like life insurance. It isn’t a “top of mind” issue with most business owners – but it should be. Their financial future, their family’s financial security and their company’s future depend on it.
By Bruce Skaistis