It is commonly reported that small business owners have neglected to save for the golden years, largely depending on selling their companies one day to fund their retirement. Do you know how much your business is worth? How much do you need to retire? Approximately, 50% to 80% of a business owner’s personal net worth is tied up in their business, however, most have no idea how much their business is worth. If selling your business is part of your retirement plan, it is essential to know the value of your business. And it is important to start tracking its value long before you sell. Business owners really should be planning their exit strategy from the very first day the business exists. If the ultimate goal is to transition ownership, then the basic function of a business is to maximize value at the time of the transition. As early as possible, a business owner should determine how much money will be needed to live the lifestyle desired in retirement and be able to track the value of their company so they know how long it will take to get there or if it is even possible at all. Most business owners have an unrealistic notion of how much their company is worth causing much stress when on the verge of transitioning into retirement. Often, they delay retirement into the future hoping things will get better or sell their business for much less than expected putting them in a constrained financial situation. Neither are good options. Don’t let random circumstances determine your future, be in control of your destiny by forming an effective transition plan.
Step 1: Get a Business Valuation
A business valuation is an essential first step in transition planning. The earlier it is performed the more effective the transition planning will be but it should be done at least three to five years before the desired transition. This timeframe is ideal as it will establish a benchmark, identify value drivers and allow time to implement change and build value. A comprehensive business valuation will entail a fundamental analysis of the business, including a historical financial analysis, a review of operations, and an assessment of business risk factors including industry and economic.
Step 2: Set Your Ideal Trajectory
The most valuable aspect of a business valuation is as a dynamic tool for building value. The only way to know if the decisions being made in a business are contributing to value is by establishing benchmarks. You have to know where you are in order to plan for where you want to go – it helps set your trajectory! Through the valuation process, value drivers are identified and should be used to measure value improvements. The value drivers are critical to implementing and executing a successful business model. During the process of a comprehensive business valuation, weaknesses and strengths of the business are easily spotlighted as the analysis identifies trends, product mix, expense management, growth patterns, capacity, asset management, cash flow, leverage and risk factors to name a few. A dynamic business valuation model can easily be utilized for scenario analysis to understand how various factors impact value. This exercise will help define the ideal trajectory to ensure that you achieve what you want.
Step 3: Build Business Value!
Do you know if the decisions you are making are building value in your company? What if you could build it faster? What if you are making the wrong decisions and don’t know it? Growth is frequently mistaken for value. Bigger isn’t always better but managed growth focused on value is key. Do you know how much more valuable your company would be with an increase in margins of 2%, 5% or 10%? Knowing the value drivers of your company will help focus you on decision making that impacts value every time. Furthermore, by knowing the value of your business it makes you a much more flexible business owner. If conditions should change and opportunities present themselves in the marketplace decision making is easier and on point with long-term goals. Likewise, as threats present themselves business owners can mitigate them faster and with confidence to protect the value they have created.
Step 4: Develop a Succession Plan
Why do investors and lenders encourage business owners to start succession planning at the onset of a business? Because just by beginning a succession plan it makes the business more valuable! It highlights that long-term vision of the entrepreneur and increases the chances of the company becoming an enduring business giving it greater access to favorable funding. It is important at some point to determine how you will exit your business. Several factors will influence the best option for you including the industry dynamics, economic conditions, competitive advantages and personal preference. Some business owners create a company with the intent of leaving a legacy to children or grandchildren. Others find key employees that know and care about the business as much as they do and want to groom them to buy-in. Often finding the right key buyer is the ideal choice as competition looks to expand or industry players want to vertically integrate in the market. The intentions of the business owner need to be carefully considered when developing a successful plan as you have worked very hard on your business and a lot of emotions can surface at the time of transition. The sooner you put a plan in place the better the chance it will happen on your terms.
There is absolutely no down-side to having a business valuation done on your company regardless of how far out retirement is for you. The earlier the better. Knowing the value of your business will guide you in putting the right plans in place to increase the value of your business whether you are three or 30 years away from transitioning. Why take the long road to achieving your dreams and living the life you want to live? What happens if you don’t get there? Find out where you are and how far you have to go. Find your ideal trajectory! For more information on transition planning, including valuation packages, please email [email protected] or call (208) 780-5462.
*PoleStar Entrepreneurial Group is all about helping business owners achieve their dreams. Let us help you reach your PoleStar!