As business owner Philip said “knowing the value of my business is everything.” Philip and other business owners need to know how their business will fund their retirement and provide for their children through sale or continued operation. Understanding more about value is the foundation for business owners’ retirement planning and more.
These are three critical components to understand:
1) In just three years, an owner can dramatically increase value. Most business owners have worked hard to start or continue the operation of a business. Often their personal income is limited by either performance falling behind expectations or by reinvesting excess cash into further growth. After all of those years of operating and building, providing a great service or product, it is (sometimes) thought that the business must be worth about 10 times cash flow. This just is not so. It is rare that a small business is valued at more than three times cash flow, regardless how many years it has been operating. Therefore knowing value and means to increase value is critical, long before expected sale or retirement for others to operate.
2) The value of a business usually includes the inventory at cost and used value of furniture, fixtures, and equipment. Inventory management, having current and properly tracked inventory, can enhance value. If one carries excess inventory, this investment may not be fully covered in the sale of the business. A practice of monitoring what is selling, eliminating slow movers to either replace with better selling items or merely retaining the cash for other-that-inventory purposes, will serve the owner well. Maintaining equipment in good condition, selling off unused equipment, or replacing ineffective equipment will not only enhance the operation but will also help to sell the business. These tidy-business features are easily observed by a buyer and can mean the difference between an offer or not, a better price or not.
3) When working with a financial planner, thinking about retirement plans, it is important to understand business value. Often an entrepreneur’s investment in a business is their most significant retirement component. To enter into planning without a value or an uninformed value, can distort retirement plans and leave an entrepreneur with less (or far greater) retirement resources. It really can never be too early to think about retirement.
Philip, as it turns out, does not want to sell his business. He wants it as a means of support for his family, even beyond when he directly operates it. He recognizes to understand value to understand how to operate more efficiently. Every investment he makes takes into consideration how it impacts value.
As a business broker and valuation specialist, I cannot over emphasize the importance of understanding value in advance. So many times, entrepreneurs wanting to sell are totally surprised by how little their business is worth AND how easily they might turn it around.
Comment here with your considerations of value or contact us for a private consultation.