A REALITY CHECK—THE TRUE VALUE OF YOUR BUSINESS
If you’re like me, you believe your business is your most valuable financial asset. Most entrepreneurs feel this way, and it’s OK. You have worked hours upon hours and invested blood, sweat, and tears into your business. I get it, but is your business as valuable to others? Maybe, maybe not.
This chapter isn’t about changing your perspective on the value or benefit of owning a business. It’s about understanding the value of the business to a third party so you can plan to retire on your business—or at the very least, have your business help you reach some degree of financial freedom.
I’m sure many of you have a mature business model and structure well underway. You’re creating monthly cash flow and hopefully a brand, a client list, a product or products, a website, and basically some equity or residual value. Some of you are just beginning to launch your concept or idea and/or making plans to build a business or real estate empire. Whatever the case may be, I want you to know the more you can see NOW about the capability or the capacity for your business to provide for future wealth, the better.
What Is the Dollar Value of Your Business?
Valuation, as it is called, is such an important topic and critical aspect to building financial freedom that I dedicated an entire chapter to the technical methods of coming up with such a value AND thus increasing the value of your business (see Chapter 19). For now, I need to present an important concept I’ll discuss again and again throughout this book: Your business is probably not worth as much as you think it is. By understanding what the market, or a third party, will pay for your business, you can hopefully make modifications and changes in your business NOW so it will be worth more in the future. There are two reasons why you think your business is worth more than it really is: passion and potential. Let’s explore those reasons.
Passion
If you’re like me, you mentally elevate the value of your business because you have an emotional attachment. Just like your kids draw the best pictures and your house is the nicest on the block, your business is worth a fortune. You are biased, and you should be. You have poured blood, sweat, and tears into your business for years. You did this by working late nights, and on weekends, missing family functions, and skipping out on trips with your friends. You didn’t take any income at times and everyone sacrificed. You took out loans, borrowed money, and invested your own hard-earned cash into your business. Why? Because your business needed you.
Such passion, dedication, and sacrifice create an emotional attachment to your business, and this will usually result in a perceived or unrealistic value. This is nothing to be frustrated or angry about. Your business does have value, and I want to build on that. We just have to be able to look in the mirror and admit that we can be emotional about our business and a little less than impartial. Face it . . . no one is going to think your business is worth more than you do.
Potential
The second reason why you think your business is worth more money is because you know your business has great potential! But do you and I spend as much time focusing on the future and development of our business model as we should? Probably not. I know I don’t. The older I get, the better I become at strategic planning for my business, but when I sit down and think of the potential of my business, I always feel like I could do more.
So what are we to do? I realize we need to pay the bills, cover the overhead, try to support ourselves (and maybe a family) with our business profits, but just sometimes, once and a while, we need to implement better strategic planning for the future sale of our business by realizing more of that potential. It’s not uncommon for business owners to think about what the business could, should, and would be able to accomplish with vision and planning. It is, however, difficult to focus on the potential when we are knee-deep working “in” the business. It’s hard to find the necessary time to step back and work “on” the business. As a result, we think the business is worth more, rather than actually making the business worth more.
While you may seek outside help in putting together an objective valuation of your business, you are still the person best able to see the potential and amazing future of your business. Because you have this unique and powerful perspective, you can build a three-, five-, and ten-year plan to improve the intrinsic, hard-core value of your business. Remember, the value of your business is more than the ability to create cash flow. It is also about your ability to make more money with your business next month and the month after that. This is how you create value.
Think about the organization of the business—not just how it’s structured, but how it’s organized. Could it run without you at the helm and make a profit? Are the accounting records in order? Do you have employee handbooks, manuals, and operational systems to help a buyer run your business without you? Why would I want to buy your business if it’s not organized and can’t succeed without you?
TIP FOR FINANCIAL FREEDOM
Processes—not persons—create value.
If you want someone to value your business at the same dollar amount as you, then the business CAN’T be only about you. The business has to have systems or processes! Yes, there will be managers at the helm, but is it organized and ready for a third party to hit the ground running? You are in the unique and powerful position to make that happen. You need to step back, “look at the forest through the trees,” and do what is most important for your business in the long run—not just what will create the most cash flow next month.
Changing Markets, Industries, and Trends
Two major mistakes entrepreneurs make is thinking that their business model, product, or service will essentially be the same today, tomorrow, and forever, and that a customer’s wants and needs will also remain the same. You have to look outside and understand what buyers may be concerned with when “valuing” your business. If there is a chance the market could change or the industry may go in an entirely different direction, what will happen to your business?
I know it’s a scary thought, but this is what an appraiser or a buyer is going to think about before they sign the dotted line to buy your business. Buyers from outside of your business will want to consider numerous factors affecting your industry, including new technology, means of marketing, and the economy in general.
The excitement of owning a business and knowing there is no glass ceiling and unlimited potential must be balanced by the fact that we can be scared to death when it comes to our customer base, the industry, or simply collecting our accounts receivable to pay the bills next month.
Creating Value Outside of Your Business
Because of this unpredictability when valuing our business, and in order to build financial freedom, we need to take profits from our business and create other assets and sources of income. This doesn’t mean you won’t have your business as your number-one asset, it just means you can’t reinvest every dime of profit back into your business.
I know what you are feeling and saying. I’ve heard it literally over a thousand times: “My business is my best and greatest asset. I should reinvest all I can back into my business where I get the greatest return on my dollar”—wrong!
If there is a change in the market forces, a change in your industry, a change in the laws or regulations, or even a terrorist attack or war, what would or could happen to your business? While a few major companies have successfully reinvested only in their business for years, way too many business owners have found themselves in great financial trouble (not to mention a ton of stress) putting everything into one bucket—the business asset bucket.
Don’t be so naive that you think nothing could happen in the world to change your business model, product, or service. Think about the business owners in New Orleans who were hit by Hurricane Katrina. They did nothing wrong to minimize the value of their businesses, and yet the values went down. This is why we need to diversify—and I’m not talking about a stock portfolio. Your business can actually help you BUILD diversity. If you want to build “Financial Freedom,” you can’t have all your eggs in one basket. You need balance in all things, balance in your business, and balance in your assets.
First, take some profits, when you can, and invest in other income- or equity-producing assets. Invest in what you know. Invest in another business with which you have a strategic partnership or relationship. Invest in some real estate. Invest in precious metals. Invest in something that isn’t dependent on the same market, industry, or customer base as your core business. Yes, you can even invest in Wall Street products and insurance, but only at the right time with the proper method that we will discuss later.
Now, I know you are busy, but you can’t afford not to take a little time every week to think outside the box. Your business could very well be the goose laying some golden eggs right now, which is great. All I’m saying is to take some of those eggs and buy some cows, or buy a farmhouse down the road and rent it to a llama farmer, or even get out of agriculture altogether and take some of those golden eggs to set up an online fly fishing store in your spare time.
You owe more to your business, and to yourself, than having the pressure of paying all the bills and providing a retirement without diversifying. Do your business, and yourself, a favor by creating some cash flow somewhere else so your business doesn’t have to be the superstar year in and year out. Let your business help you diversify.
TAKEAWAY 1—Entrepreneurs have an emotional attachment to their business, which often creates a perceived and unrealistic value of the business.
TAKEAWAY 2—You are in a unique and powerful position to build value in your business by taking time to create a strategic plan that will produce a greater core value for your business that others will also see as a value.
TAKEAWAY 3—A business, and the outside world around it, is intrinsically unpredictable. Therefore, we should not reinvest every dollar back into our business. Instead, it’s important to peel out profits, when we can, to redeploy and invest in other income/equity-building ventures.