Did You Know That Treating Your Business like an Investment Can Lead to Wealth?

Tim McDaniel | June 19th, 2013

If you’re a business owner, did you know that you can significantly increase your net wealth by simply changing the way you look at your business?

Typical business owners have more than 60 percent of their net worth tied up in their business. That’s a huge piece of their nest egg. Yet, most business owners don’t treat their business as an investment – as something they need to watch, nurture and care for just as they do their 401(k) or other investments. As a result, most owners work more years than they want to and are unable to retire at the lifestyle they expected to. How can you develop an investment mindset towards your business? There are five steps you can follow that will help you develop an investment mindset:

  1. Know the value of your business. Developing the “investment mindset” toward your business is an excellent way to avoid this fate and become wealthy. Just as you receive quarterly and annual statements from your investment advisor so that you know the value of your stock portfolio, you should receive periodic reports on the value of your business. A professionally prepared business valuation from a qualified professional will give you a reality check on the actual value of your business. If you don’t have a valuation prepared, you are simply guessing what your biggest investment is worth.
  2. Set a growth goal for your business investment. Your business is no different than your other investments. Small changes in the annual rate of return will have a large impact on the future value of the investment. Those who set a target for annual growth are much more successful in meeting their personal wealth objectives than the typical business owner.
  3. Make specific plans to grow the value of the business. There are specific strategies that will significantly increase the value of your business. Identify what drives value in your business, and then develop specific action plans to positively impact those value drivers. You will watch the value of your business increase dramatically.
  4. Protect your business from value detractors. If your business is the largest component of your net worth, then it is critical that you avoid an event that will cause a major loss of value. Identify areas in your business that can lead to a large loss in value. Some are out of your control (e.g., government regulations and international events). However, there are many exposure areas you have control over and can take steps to protect the value of your business. It is tragic when the business owner has developed a great business model but sees their value destroyed by an event that could have been prevented.
  5. Determine your exit strategy. It’s never too soon to start planning your exit strategy. You will eventually leave your business, and the sooner you plan, the more options you will have to execute your plan at the right time. This does not mean that you are planning to sell it today, but should you make that decision or are forced to do so by events outside of your control, your business is in “ready for sale” condition.

Your business is every bit of an investment as stocks, bonds and mutual funds are. Treating your business like an investment is the key to increasing value and building wealth. When you do, it is possible to double or even triple the amount you will receive when you sell your business.

Get To Know Your Business’s Value

Do you need help determining what your business is worth? Looking for advice on how to increase the value of your business? Contact Rea & Associates. Rea’s Ohio business valuation professionals will evaluate the current value of your business and help you build a plan to increase its value. Whether you’re looking to sell or to grow, we’ll help you manage the value of your most important asset: your business. If you want to learn more about treating your business as an investment, read about “The Investment Mindset.”

 

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