Why You Should Know the Value of Your Business
A business is likely the most valuable asset in a business owner’s financial portfolio. In fact, studies show that 80% of individual wealth comes from the sale of businesses. When you think of it like that, it’s obvious that a business owner would want to know the market value of the business. And yet 90% of the owners of small and medium-sized businesses have never had their business valued.
Contrast this to how people manage their retirement funds. Even when someone is years away from retirement, they regularly contribute to the account and at least glance at a quarterly statement to see how things are going. That makes sense since the retirement fund will hopefully provide the means to retire.
Just like with a retirement fund, a business owner is constantly managing the business in a way that is either contributing to a more valuable enterprise or deducting value from the business. It is important to know what your business is worth so that you know how and where to grow it.
Here are three reasons it’s important for business owner to know the value of the business today, even if the owner is not looking to sell the business any time soon:
1. You need to know where you’re starting from.
Before you start a journey, you must know your starting point. This is true whether that is trying to lose weight, take a family road trip, or reach your financial goals.
This goes for your business as well. Regardless if you plan to sell your company in 3 years or 30 years, you need to know what it is valued at today in order to get where you want to go.
Knowing the value of your business arms you with knowledge that will change how you think about your business and is the first critical step to making it more valuable, regardless of your plans to sell it.
You must know where you are starting from to measure if you are making progress along the way.
2. You need to know your end goal.
One of Steven Covey’s 7 Habits of Highly Effective People is to “start with the end in mind.” This means that if you want to get someplace, you must have a clear picture of where you want to end up.
It’s a healthy exercise to picture the end of your business, even if it does take some courage to ask the hard questions.
• Do you see yourself years in the future walking out the door of your business for the last time, turning off the lights, and locking the door? It just ends.
• Do you see the business transitioning to a new generation, whether that is a family member or a new entrepreneur, who is willing to grab the baton from you and continue the work you started?
In the book, Built to Sell, John Warrillow emphasizes the importance of knowing the specific number that you want out of your business. He even stresses that you write the number down and put it into a sealed envelope.
It’s not enough to say, “I want to have enough to retire.” Or, “I want enough to pay for a new home.” You need to identify a specific dollar figure you want to get out of your business. While this number might change over time, identifying a specific number will help focus your efforts. It will give you a clear target.
Without knowing your business’ current value, it’s hard to come up with a realistic future value.
3. Now you can create a plan.
Knowing your starting point and end goal will change how you think about your business. It will no longer just be about keeping the lights on or making marginal improvements over time, you will more clearly see the big picture.
Knowing where you need to get to reach your end goal helps you anticipate what areas need to change in your business. For example, maybe your business currently generates $1 million in revenue with 10 employees, equaling $100,000 in revenue per employee. If your end goal requires you to reach $2 million in revenue, that means you likely will need to double your number of employees. Or, it might mean that you need to find ways to generate more revenue per employee. Either way, you are now looking at your business in a way that you never have before. Discoveries like this stir new ideas and motivate actions needed to achieve your target. Without this mental roadmap, most business owners will simply plug along year after year going down the same path.
As a business owner, you’ve probably already made the decision to run your business for the next 5 – 15 years. Why not use those years to not only provide a living but also increase the value of your company?
By knowing your starting point, selecting an end goal based on this figure, and putting in place a plan to reach your goal, you are well on your way to creating a highly valuable company. If you don’t sell your business, you will find yourself with a healthier, more autonomous company that is more enjoyable to run. If you do sell your business, you’ll end up with a higher return than if you had not gone through the process of finding out the value of your business.
The Capitalist Alliance
We are a Colorado business consulting firm that focuses on helping business owners get what they want out of their businesses. We are excited to accept AMERO as payment for many of our services. Find out more details by going to www.Capitalistalliance.com/amero.