- Wednesday 14 July 2021
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YOUR BUSINESS: INCOME, VALUE OR BOTH?If you are a business owner; alone, in partnership or as shareholder in a larger group, you need to ask yourself whether the company you built is for income, an asset, or both.
- If it’s the former, and many successful entrepreneurs view their creation in those terms, then your obligation is to extract the maximum wealth from the business into your personal name before you close the doors for the last time.
- Building a company solely for sale is not that common in Ireland and requires the confidence and ability to jump on the Startup/Angel Investment/VC merry-go-round to ensure a successful journey
- The ideal company combines income generation, especially in the early days, with a capital value appreciation over time. Many books have been written on how to build, or convert, a business into an asset and it’s well worth your time to learn how to do this.
WHY VALUE AT ALL?
Research has shown that business owners, directors and shareholders who are able to put a value on their business are more likely to grow the value of that business than those who don’t. This is because leaders like success metrics! It’s all well and good to try and grow revenue by 10% YOY, or EBITA, or any other P&L item. However these are individual components rather than the full picture. A proper valuation takes into account the scope of the business, it’s position in the industry and the value of the industry as a whole. This leads to better management decisions in terms of strategy and operations.
Valuing a business also incentivises an owner in a key psychological way. It puts a number on your % shareholding!
“Turning your business into a personal asset is one of the most powerful methods of wealth creation there is, and will make you work smarter than ever before”
YOUR BUSINESS AS A PERSONAL ASSET
When we work with business-owner clients and are reviewing their assets & liabilities, it is amazing how many will look at their home as an ‘Asset’ (it isn’t) and omit their company entirely. Pressing them on the matter can be illuminating as you very much see different categories of business owner emerge, including:
- Lifestyle Owner
- Accidental Owner
- Family Business Owner
- Fingers Crossed Owner
Ask yourself – are you any of these?
In almost all cases in working with these owners, we find that FEAR is the main blocker to the valuation process, as people are either nervous that their ego will be damaged if the value is low or nil or unsure of the implication if it is in anyway significant. These are perfectly understandable concerns, but must be overcome if you are to realise the benefits that the valuation process brings.
“Don’t be afraid of the number. It’s simply a starting point”
WHAT'S IT WORTH?
If you don’t know what, if anything, your business is worth, remember that it’s usually quite easy to find out. Most accountants can either value your company themselves or put you in touch with someone who can. If you work in an industry with a representative body, ask them. No doubt there are competitors & peers going through the process right now, and in many cases there is a ready-made methodology to work it out. It will probably involve some form of equation that applies a multiple to turnover (great!), EBITA (less great) or recurring income, client bank or asset values.
In our experience, owners usually find the valuation process extremely beneficial in itself as it forces honest and open assessment of existing practices and expectations. The change owners go through can often be profound.
“Embrace the valuation process and get the most you can from it”
When you get your business valued, it should drive two separate but complementary actions:
- Company Value Growth Strategy
- Personal Wealth Growth Strategy
It is the second one of these that we, as personal Financial Planners, work with our clients on. It is amazing to be able to suddenly include a business as an asset in a client’s portfolio and see the impact it has on their decision making process. It changes everything, from remuneration and wealth extraction methods, to exit/retirement strategies and even estate planning goals. And once you are there, you can never go back.
“Put your company in YOUR balance sheet”
PROTECTING THE ASSET
Imagine you spent decades building an apartment complex, putting in 60 hour weeks to bring it from foundation to completion. Finally, it was finished and let, to generate income for you and your family for years to come. Then you died, and, instead of your family taking over the complex, they had to watch as it was simply demolished in front of them.
This is, unfortunately, the experience of family and loved ones of a business owner who never valued what they built and put steps in place to protect it for them. The frustrating thing is that there is no shortage of cost effective methods to ensure that in the event of something happening, the company you built doesn’t die with you.
- Shareholder agreements among owners including insurance for pay-out to families
- Buy/Sell agreements among peer companies, or even competitors
- Comprehensive strategies to pass on business to family members, again with payments to others where necessary.
“Make sure your hard work is rewarded, whether you are here or not”
If you would like to explore cost effective methods to protect your business, CLICK HERE to book a meeting at a time that suits your schedule.