Keeping Your Business Investment on Track
This year, as before, investors are advised to take specific steps as they review and reevaluate their financial picture. Many will do so with the help of their financial advisor. Most, sadly, will not but will instead allow their IRA or 401(k) or other retirement or investment account to remain unchecked and subject to whatever whims the market chooses to bring.
With 2016 in the books, business owners should take the opportunity to review and reevaluate what is, for many, their largest single asset: their business or professional practice. Owners must view their business as an investment and appraise it in the same way as they would their 401(k), retirement or other investment holdings. Just as investors may need to redirect or rebalance their investments to better support their retirement and other financial goals, so too owners may need to refocus their business to better support their short-term needs and ultimately, their transition. We generally begin with these three guidelines. (For more, see: How to Reduce Risks In Small Business.)
1. Clarify the Objective of Your Business Investment
Initially, we may conclude that since our retirement is years away, our portfolio should grow as quickly as possible. But as we get older it may be time to slow things down, or redirect our investments or even reduce our risk as preserving or protecting our retirement funds becomes important. Additionally, our personal situation may have changed. The new job might pay more. Or less. We may have experienced a family illness. Or gained an inheritance. These, and other life changes, should cause us to re-think our investment strategies.
The same is true for owners. For most of their careers, they may have been focused on growing their company. As they approach retirement, transitioning their business to another, whether by sale or by gift, becomes a priority. Just as it may be important to protect our retirement funds, an owner should start protecting the transferable value of their business as they consider leaving it.
Staying focused on your goals requires both discipline and patience. At some point owners must decide on how they intend to leave their business. If they plan on selling it, the value of the business will need to be established and then reviewed regularly so as to avoid any unpleasant surprises. If the goal is to transfer or sell the business to key employees or family members, the receiver’s ability to manage the risk of ownership as well as to obtain financing should be established long before the transfer is scheduled.
By regularly reviewing their defined objectives, owners will become increasingly confident that their business transition plans are on track. (For more, see: Creating a Risk Management Plan for Your Small Business.)
2. Review Your Business as an Investment Portfolio
In addition to being a source of income, a business is a capital asset. Consequently, it is important for owners to know both the earnings (income) the business is expected to provide for the foreseeable future, as well as its worth (value). The owner’s objective for the business will determine which is more important. For example, if the company must be sold to complete the owner’s retirement funding, strategies to improve its value and appeal to prospective buyers will need to be designed and implemented. Keep in mind that these strategies can be demanding and go much further than simply increasing sales.
We once estimated the value of manufacturing company. Although the business generated a nice income for the owner, it did so at the expense of its value. First, since the operations were overly dependent on the owner, a buyer would likely be purchasing a “job” - one that required an enormous amount of his or her time. Second, most of the sales (more than 80%) came from a single buyer, putting the business at risk. Third, to save taxes, several personal expenses were run through the company’s books. Fourth, well you get the idea.
Had the owner first established and then reviewed the value of the business, he could have changed things to improve its worth. Or, he could have taken additional money out of the business and invested in other non-business assets. Instead, he had to work much longer than he had planned.
3. Stay Disciplined Until the End
It’s important for investors to stay focused and disciplined. It is even more so for business owners.
How well do you understand your company’s cash flow, adjusted income and transferable value? How does your business or practice match-up (benchmark) against others in your region or industry? What changes can be made to your operations that will have the greatest impact on its cash and income and value? How well has your business performed over a rolling three-year period? What would it take for your company to grow by $X? What impact would this have on your overall net worth, including your business related investments?
And finally, how well do your business objectives and plans align with those you have set for your life and family? What must be done to ensure these are in synch?
By answering these questions, owners will begin to see the specific steps needed to guide his or her business closer to its intended purpose.
When all is said and done, a business or practice is an investment. And like all investments, its purpose and objectives should be clearly understood and regularly reviewed. Only then can an owner be confident that their entire portfolio, not just their retirement and investment accounts, are working together to support their personal and family life and wealth goals. (For more, see: Why Successful Business Owners Sell Out.)