While generalizations can be problematic depending on the context, we believe it is fair to say people invest to increase their savings. Whether they invest in the short- or long-term, at the end of the time frame, the investment is meant to serve a purpose. The purpose can vary from a down payment on a home to funding retirement but regardless of the purpose, our investments, make up part of our overall net worth.
For business owners, their business is one of their investments. In fact, it is likely their largest investment – most self-report having 75-95% of their net worth tied up in their business. And like all investments, at some point in the future, they will want to ‘cash-in’ on their investment when they sell their business and transition to retirement or the next stage of their business life.
While many people in their working career put money into investments like stocks, bonds, mutual funds, real estate and so on, a business owner keeps investing in their business to grow it. That is to say, they often continue to add money to their business to expand, update equipment or otherwise build it. However, when they do this, entrepreneurs don’t necessarily think of this as part of their investment portfolio. Many would be unable to tell you what the return on the investment in their business is.
Business owners tend to be focused on growing their business and keeping it strong so it flourishes in the long-term. This mindset, though important, may not be conducive to the understanding that all the time and money they put into their business is an investment that is required to have a return.
Working in the business rather than on the business can limit an owner’s future thinking for eventual exit and the need for a return on their investment. Intent Planning encourages owners to consider what return they would want on an investment in another business. If they were a third-party investor, what is the level of return they would want to see? What is the minimum return and what would be ideal? If they are not getting that from their business today, how can they make sure they will in the future?
Approaching your own business like a third-party investor takes critical, objective thought and intention. Quite often, it will be the first steps toward clarity about the current value of their business and the importance of future value needed to harvest the highest return on their investment. We recommend starting with a company-wide review of the return on investment and then a deeper dive into each division, product or service to find out where performance is weak or strong. Next, take steps to strengthen the strong areas and adjust or remove the weak ones.
Building transferrable value in your business takes intention and commitment. However, it is in this transferrable value where your business’s return on investment lives. If you are unable to achieve a desired return on investment, how would the next owner be able to? Not being able to answer that question means a lower sale price, or no opportunity for sale, for your business.
Building your business to be ready for sale at any time makes good business sense. Keeping it in optimal condition means you are ready should an unsolicited offer be extended to you. Even if a sale isn’t forthcoming, your business is positioned in a place of strength with transferable value or increasing return on investment.
While non-business owners tend to follow a diversification strategy with their investments to make sure they manage risk, business owners are unable to because so much of their net worth resides within their business. Yet entrepreneurs seem to be comfortable with this risk and in fact, foster it by continuing to invest in their business with time and money. They do this year after year with the hope and understanding that, one day in the future, they will be able to harvest the wealth and transition to the next phase of their life.
Intent Planning team members are committed to helping all our business owner clients have the best possible return on their investment so their long-term goals can be achieved. Connect with us to start thinking like an investor in your business and building its transferrable wealth.