Why should I treat my business as an investment?

Tim McDaniel | April 23rd, 2010

To answer this question, think about the stocks and bonds you may have invested in. Everyone wants to maximize the value and annual return on their investments. But many owners of closely-held businesses don’t place the same attention and care to determine the value of their businesses or work to improve their return on their largest investment.

Just like your stock portfolio, your business requires tending to help it create greater wealth. And just as you pay a fee of about one percent of your portfolio to an investment advisor to track and value your assets, you should plan the same to invest in the valuation and management of your business value. Typically 50-70 percent of your net work is tied up in your business. If you could double its value, wouldn’t you do it? Other businesses have seen this type of return and you can too.

To improve the return on your business, follow this five point plan:

Business valuation – Just as you receive quarterly or annual statements on your stocks and bonds, you need to establish your company’s net worth, which allows you to make better business decisions by being proactive rather than reactive.

Improving the rate of return – Once you know the true value of your business, you can take steps to increase your rate of return. This can include reducing risk, increasing sustainable growth and improving your cash flow, to name a few.

Financial statements –  Although not required for privately-held companies, professionally prepared financial statements allow you to look at your financial situation through the eyes of an investor. These statements allow you to compare against benchmarks in your industry and make your business more attractive to investors or potential buyers.

Buy-sell agreement – A buy-sell agreement is the “last will and testament” for your business. It ensures what will happen if one of you dies or becomes incapacitated. Review it annually and update it to the current value of the business and to reflect any changes in shareholders. Review any life insurance policies for key shareholders annually to coincide with the buy-sell agreement.

The exit plan – Succession planning hinges on your personal financial planning and estate efforts, your personal goals, and also the goals of your family. It’s complicated. But it’s also a must to get everyone’s honest intentions in the open. There may be multiple options – such as gifting your business, selling to an ESOP or to a strategic buyer.

Although it may not look like stocks and bonds, your money, your time and your passion are tied up in your largest asset. Take the steps to maximize your return by working with a valuation professional who is experienced in succession planning and mergers and acquisitions.

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