Why You Should Know the Value of Your Busi­ness

Trillions - - Contents - By The Cap­i­tal­ist Al­liance

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.

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