For many business owners, the majority of their net worth sits in the value of their business. It is common for business owners to view their business primarily as an income source (perhaps for family members as well as themselves), a job, or an “ATM,” rather than what it really is: an investment, and probably their most valuable asset. The same business owners may spend time managing their investment portfolios and/or consulting with their wealth managers, while overlooking the need to maximize the long-term value of their largest investment through an optimal exit strategy.
A private business represents wealth that can’t be spent today, and most business owners don’t have an exit plan to convert it to cash when necessary or desired. These owners likely have made great personal and financial sacrifices along the way, and are finally enjoying the benefits of their hard work. They’re naturally focused on the day-to-day demands of the business, since that drives near-term results and results in cash in the bank today.
Yet, the same focus that led to success for these business owners can keep them from taking a step back and focusing on the endgame, which is a sale of the business and/or creating a succession plan. They should be addressing these crucial questions:
- What is my business worth?
- How do I grow its value?
- How do I exit my business when I’m ready?
Here are some suggestions for business owners to tackle that process.
Step One: Get a Valuation of the Business
A business valuation gives you a snapshot of your company’s current value. Many business owners estimate value based on guesswork or revenue multiples paid for transactions in their industry. While this sometimes happens to be what an informed buyer would pay for the business, it usually isn’t. In addition to providing a “reality check” on value through a cash flow-based analysis, a valuation advisor can work with you on value scenarios under hypothetical assumptions, such as adding new product lines, opening new locations, and expanding your workforce. A valuation advisor can also help you to identify areas for improvements to cash flow such as better inventory and accounts receivable management. Armed with this information, you’ll be able to make well-informed strategic decisions to maximize the value of your business.
Step Two: Consult with your “Team”
As a business owner, you have a team of trusted advisors that supports you in the company’s operations. This includes your management team, your family (who may also be employees or even board members), and your external advisors such as your CPA, attorney, wealth manager, insurance broker, and other consultants. Once you know what your most valuable investment is worth, and have formulated a strategy to grow or unlock that value, you’ll be equipped to have informed discussions with your “team” to establish the exit plan.
Step Three: Formalize the Plan
Since your exit plan involves a number of “teammates,” consider drafting a document (it could be as simple as a short memo) formalizing the plan and each teammate’s role. Share it with the team. Review it regularly: quarterly is best, but at least annually. Don’t forget to consult with your teammates annually, to ensure that the plan is still the right one given your current situation.