IE Business Daily Business news for the Inland Empire.
By Edward L. Fixen
Chances are, if you’re the owner of a closely-held business, you treat your business more as a lifestyle business. Generally, that means you are very focused on maintaining and/or increasing cash flow from the business to support you and your family’s lifestyle. Sure doesn’t sound like such a bad thing but why stop there when the benefits are so great.
If you treated your business like an investment, you would broaden your focus to include not only cash flow but also understanding the value of the business, reducing and/or eliminating business risks that have a profound and real effect on the value of your business and the certainty of that cash flow in the future. As an investment, you would also place greater emphasis on a succession plan to unlock and capture the wealth in your business when it is time for you to exit. The marketplace for closely-held businesses is far more uncertain and challenging than the stock or real estate markets and deserves advance planning.
Closely-held businesses are typically a business owner’s most valuable asset. Yet, isn’t it a bit ironic that we can quote the value of our stock portfolio and/or real estate investments but probably don’t truly know the value of the single largest asset? Even fewer have a succession plan to maximize business value and the return on that investment when it comes time to transfer the business to a shareholder, family member or 3rd party buyer!
Until you’ve had a professional business valuation prepared, it can be difficult to appreciate how the value of a business consists of much more than a financial analysis. The value of a business can be equally affected (positive or negative) by non-financial business risks such as depth of management, customer concentration, economic risk, industry risk, legal risk, regulatory risk, etc. Treating a business like an investment means knowing the current value, understanding the factors (financial & non-financial) and risks that affect value, investing in the business to maximize future value and having a plan to enable you to unlock and capture the wealth in the business on your terms.
It’s entirely possible that the best business investment you could make might be to develop a management team that enables you to replace yourself. Perhaps you might be well served to acquire a competitor with a customer base that complements your existing customer base and reduces the risk of a highly concentrated customer base. Properly executed, these strategies should improve earnings while also reducing your business risk, which translates into a higher business value. A business valuation would help you understand and identify the value that these or other improvements could have on your business investment in terms of actual dollar value.
Even if you have no plans to sell the business, understanding the current value and having a succession plan will help to identify opportunities to improve cash flow and the reliability of that cash flow in the future, which is just another way of saying increased value for you and your successor. At the very least, a business valuation will help you understand the current value, identify opportunities and strategies to increase the value of your business to meet your financial goals and close any wealth gap for retirement.
The message is simple, if you start treating your business like you would any other investment, it should improve the earnings of the business and continue to support your lifestyle but will also enable you to improve and protect your lifestyle when and after you exit the business.
Author: Mr. Fixen is a Certified Business Appraiser (CBA) and Certified Business Broker (CBB). Mr. Fixen is the President of BusinessQuest, a business valuation and M&A brokerage firm serving small & mid-size, privately-held businesses throughout California. Ed can be reached at (909) 636-9827 or [email protected].
