Are your business assets working with or against your personal assets?

By Larry Smith, CPA, CVA, CM&A, MBA

Is your business’ value growing at the rate you need to secure your retirement? As a business owner, there are a few questions you can ask yourself to help determine the answer:

1. What is the return on my investment (i.e., my business)?

Many business owners do not look at their business as an “investment”. Instead it is viewed as a vehicle that provides an income to maintain a standard of living. Like any investment, a business should provide you a return for your time and money invested. How do you evaluate the business’ return on investment (ROI)?

·         Ask your CPA what your “return on equity” is. If you don’t want to ask, divide the earnings on your profit and loss statement by the amount invested by the stockholders on the balance sheet (i.e. net income/stockholder’s equity).

·         Calculate the ROI for each of the last 5 years.

·         Determine whether the trend is flat, erratic or growing.

·         Compare this result to your other investments’ ROI in your personal portfolio.

·         Should you continue making contributions to this investment?

·         If you were a potential buyer, how much would you invest to get this type of return? Your answer will tell you how much of the value you may have to finance when you eventually decide to sell your business.

2. Am I reducing my investment’s overall risk?

Why is this important? When you decide to sell your business, potential buyers will use their perception of risk to value your business; the higher the perception of risk, the lower the perceived value. You might be saying, Wait a minute! After all these years, my business’ value will be in the control of someone else’s perception. Well, possibly. It depends on how you are positioned for an eventual exit. How do you control your “exit position”? You have to focus on reducing the risks in your business as perceived by potential buyers.

What are some “perceived” risks in a business? Business risk can be broken down into over 100 different segments. To keep it simple, we look at business risk as factors that are either “in your control” or “out of your control”. For instance, regulations imposed by your industry are out of your control. The suppliers you do business with are more in your control. Other areas of risk include the level of profitability levels, customer concentration, level of debt exposure, etc. Try putting your buyer’s hat on and assess the various elements of risk in your business. If you determine that it is high, don’t count on its value to solidify your retirement nest egg.

3. After combining my business’ value into my investment portfolio, do I still have the same level of asset allocation?

Unfortunately, this is the question few business owners ask because they do not view their business as an investment. How do you assess the impact that your business has on your overall asset allocation and level of risk you are assuming?

·         First, view your business as an investment

·         Speak to your financial advisor to determine how the risk in your business has been allocated across your personal portfolio.

·         Don’t guess what your business is worth. Have a professional valuation prepared to know whether the business is appreciating in value. Most owners assign an emotional value but overstate the real market value.

·         If necessary, hedge your risk by divesting a portion (if not all) of the investment.

·         Invest your time wisely to reap the financial rewards you deserve.

The level of risk inside your business (as perceived from a prospective buyer) will directly affect the ultimate value you receive. When you decide it is time to sell, buyers might see more risk and will negotiate the business’ value down. If you are depending on it to secure your retirement, evaluate how it affects your total portfolio.

Our experience working in the marketplace helping people value, buy and sell companies tells us that the prospective buyer’s perception (right or wrong) is all that matters. One wrong perception can destroy your value and a potential sale. Overcoming those misperceptions is not an easy task, especially during the process of marketing and selling a business. It might take months or even years to fix. Leave yourself enough time (say, three to five years) before you want to sell so you can take control over what ends up in your pocket.

Larry Smith is the Co-Founder of Northeast Capital Alliance, an investment banking advisory firm which specializes in helping people sell, buy, value and fund middle market companies. We maintain all interactions with the highest confidentiality. Larry can be reached at 508-881-2887 or Lsmith@northeastcapitalalliance.com.