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For many entrepreneurs, their business provides a means of employment and income as well as an outlet of their passion and desire for an independent lifestyle. However, many business owners don’t realize that their business is, in actuality, an asset that should one day be monetized for their financial benefit and that of their family.
Because business owners don’t often think of their business as an asset, they don’t manage it as an asset. While they may focus on running the business successfully, they don’t focus on growing its value. Instead, they treat the business like a job, and as long as it’s generating sufficient income to support their lifestyle, then it’s considered a success.
By not treating your business like an asset, you could be missing out on growth opportunities today and the potential for a more financially flexible life tomorrow.
How do you know if you treat your business like a job?
To determine if you are treating your business like an asset or a job, ask yourself these important questions:
- Can you leave the business for 48 hours without everything falling apart?
- Do your customers and/or suppliers have relationships with anyone other than you?
- Do you know the value of your business?
- Are you able to invest your profits in investments outside the business?
- Do you have a plan to transition the business in a manner other than liquidation?
- Could you leave the business tomorrow and be financially secure?
If you answered no to a majority of these questions, then you are most likely treating your business like a job, not an asset.
How do you treat your business like an asset?
Like any asset you own, you want to accomplish three things:
- Minimize risk.
- Grow value.
- Cash out.
The first step in treating your business like an asset is to determine what exposure exists internally and externally that could threaten the viability of your business. Then, strategically put strategies in place that mitigate those risks. Some risks like competition and economic conditions are out of your control. But other risks like losing a key employee and diversifying your client base are not. Keep in mind that the most common risk that exists in small businesses today is owner dependency. (Related: Do you know the risks to your business?)
When it comes to growing value, owners should focus on enterprise value, which looks at three distinct factors:
- The operations of the business.
- The historical financial performance of the business.
- External market data (or how similar businesses have sold in the marketplace).
Remember, as much as 80 percent of a business’s value is tied to its intangible assets, which include the strength of your brand and management team, the documentation of your policies and procedures, and the stickiness of your customers. So, these are a great starting point when you are looking to grow.
Finally, when the time comes to cash out, it's critical to understand all your exit options and select the appropriate strategy that meets your personal goals. According to the 2022 MassMutual Business Owner Perspectives Study, half of all business owners don’t believe their chosen exit strategy will maximize the amount of wealth they receive when they transition out of the business. This can create retirement income shortfalls and an owner who never truly is able to leave the business.
By treating your business like an asset, you'll create a valuable, transferrable company that can thrive independent of your involvement and better position you to receive its full value when the time comes to leave. Furthermore, you may realize that a business that isn’t just a job is a much more enjoyable business to run and may even reignite that fire in your belly to take it to the next level.
Discover more from MassMutual …
What drives value in your business?
Be sure your business is always ready to sell
Retirement Planning: A major blind spot for business owners
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