Five Steps to a More Valuable Business: Identifying and Protecting Value
The primary long-term goal of a business shouldn’t be income, but value. It might be a subtle play on words, but it’s a major paradigm shift for business owners to focus more on transferable marketable value than income. This shift in thinking needs to permeate the entire organization. Teaching employees about the importance of value versus income will bring a different perspective to the day-to-day business decisions.
In this two-part blog series, we’ll cover the five stages to creating a more valuable business: identify, protect, build, harvest and manage wealth. As you progress through each of these stages, your value grows.
Step 1: Identify Value
Identifying value is always the first step and should never be skipped. It’s completed through a professional business valuation. Understanding your business’s range of value can benchmark your business against others and sets the baseline for everything going forward. This is important for several reasons:
- 80-90% of your net worth is likely locked up in your business
- You need a system to continuously focus your team on maximizing this value
- The ability to unlock that value at some point in the future will make a significant difference in your lifestyle and future plans
- Knowing the value range is vital for business planning, personal planning and estate and tax planning purposes
Step 2: Protect Value
Once you have identified your baseline value, the next priority is to protect that value by mitigating personal, financial and business risks. Protecting value is accomplished by creating and implementing prioritized de-risking action plans.
Actions to reduce risk are common sense and the easiest to implement. If you were to do nothing else, mitigating risk alone would improve the business value because business valuations are based in part on the real and perceived risks from a buyer’s point of view.
Understanding risk tolerance and willingness to complete actions that protect value is imperative before you start building value through strategic growth initiatives. Consider what we call the Five D’s: Death, Disability, Divorce, Distress and Disagreement. Most of us don’t think these events will ever happen to us. In reality, there is a 50% probability that you will be impacted by one of the 5 D’s, so it’s important to be prepared with a strategic business transition plan.
Part two of this blog series will discuss Building, Harvesting and Managing Wealth as part of your journey to build value in your business. Contact an Anders advisor to learn how to implement a successful transition strategy for you and your business, or read more about our Business Transition Planning Services.
For additional reading, check out Chris Snider’s book, Walking to Destiny – 11 Actions an Owner Must Take to Rapidly Grow Value and Unlock Wealth.