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.
Below 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.
Step 3: Build Value
Once you have protected your value, you can focus on building it.
In the build stage, you will take a longer point of view, prioritizing more strategic actions to increase intangible capital over less strategic actions. Building value results from increases in cash flow and improvements to your multiple, which is the number assigned by the private capital market to the value of your tangible and intangible assets and the risks associated with your business.
Intangible assets are “knowledge capitals” and can be divided into four areas:
- Human – the value of your talent
- Structural – the value of your systems and intellectual property
- Customer – the value of your customer relationships
- Social – the value of your brand and culture.
Step 4: Harvest Value
As some point, cashing in or harvesting the value of business is in your future. Harvesting represents the thought of a growing season, where harvesting marks the end of the growth cycle for your particular crop: your business.
There are many business transition options, from internal exits for intergenerational, key employees and partners, to external transitions for private equity, family offices or strategic buyers. It’s important to explore each possibility.
Step 5: Manage Value
Managing value is the last stage, but not because it comes at the end after you harvest. It’s last because it represents full maturity.
You should obviously be managing value through the entire process, not just at the end. If you have identified, protected, built and harvested value from a personal, financial, and business standpoint, you have managed your value. Managing value begins with identifying it. Remember, to effectively achieve results, it’s not just the value of your business you need to manage. You need to manage your personal value and personal financial net worth as well. If you actively manage value through the entire process, you emerge financially independent of your business, with lots of options when the time comes to transition. It also preserves those options whether or not the transition is on your terms and timeline.
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.All Insights