Knowing the value of the business is critical to the planning necessary to successfully exit your business. For most owners, their businesses are their most valuable asset – think of it is the 401K for the business owner.
Accomplishing financial goals depends on converting that asset to cash. Based on owners’ knowledge of the current value of their businesses, owners and their advisors can determine the following:
- Whether an owner’s financial objectives can be met at present through a conversion of value to cash.
- How much the business’ value must grow in order to reach the owner’s retirement objectives (this is more common than the preceding point).
- Whether, and how quickly, they make progress.
There are three parts to focusing on business value:
- Increasing the value of the business.
- Protecting its existing value.
- Minimizing current tax liability and liability with transfer of ownership.
Increasing the value of the business
An inevitable byproduct of a consistently well-run business is the ability to consistently increasing value. There are numerous actions an owner can and should take to maximize value. These include the following:
- Maintaining and consistently increasing cash flow.
- Creating and using efficient systems.
- Documenting the sustainability of earnings.
- Motivating and keeping key employees.
This Step goes to the heart of a successful business and to the essence of the role of a business owner within the business to enhance value.
Minimizing Risk
A future buyer may not even consider purchasing a company if there’s a risk that its value will decrease. A good example of this is a fear that current employees will leave under new ownership. So, as a business owner – Have you taken steps to make sure your key employees stay with a new owner after you exit?
Developing financial incentives to induce key employees to stay and/or putting restrictions in place to prevent them from leaving and taking employees, customers, vendors, and other relationships with them is a first step to minimizing this risk.
Minimize Tax Liability
There are many tax-minimizing techniques owners employ as they work toward their exits. Charitable remainder trusts, ESOPs, defined benefit plans, and lowest defensible value are examples of tools used to minimize taxes.
It takes years to reap the benefits from most tax-planning strategies. Assuming both income- and business-tax rates are likely to increase, can you afford to wait to investigate various tax-saving strategies?
In summary, business valuation is a critical part of exiting your business. It’s important to know – AT ALL TIMES.
Some good questions to ask yourself:
- Do you know your current business value?
- Do you know what your financial needs are to “retire”?
- Do you know how to increase the value of your ownership interest?
- Do you know how to protect the business value you’ve already created?
- Do you know which actions are necessary to minimize income taxes not only today but also when you transfer ownership?
Armed with a written Exit Plan, a team of skilled and experienced advisors, and with (ideally) several years before you exit, you can optimize your ability to leave your business in style.
