Long term planning: Create Business Value Today with Tomorrow in Mind
While owners of most start ups and small businesses will say they have enough on their plate dealing with financial and employee issues occurring today, they should always keep in mind that someday they will leave their business, voluntarily or otherwise…and whether that transition is somewhere down the short or long road, the actions taken today to preserve and create business value will chart the course for a lucrative tomorrow.
Creating value begins at the embryonic stage of a business, starting with choice of entity and its tax structure. These decisions made at the inception of the business can play a very large role when you sell a business. You should consult with your attorney & CPA to understand the impact your business legal & tax structure may play in the future.
Once the legal & tax entity is in place, understanding how you can build value in your business should be the top priority of the entrepreneur who envisions an eventual sale of his/her business. Business value is a component to a successful start-up that should never be underestimated.
Certainly, during the current anemic economy, those who are out of work or unemployed may consider starting their own business solely as a means for employment. But even in these challenging times, business owners should also be focused on how their decisions today for income generation may impact their long term business value. They should not lose perspective and make short term decisions that may have an adverse long term impact.
Far too often, small business owners focus most of their time, effort and attention on increasing sales at any cost. Operating on a tight budget and with limited staff can create a mindset of “do or die.” But attention should also be paid to the future, even in the face of a small business owner struggling to keep afloat in a struggling economy. The answers to some of these tough questions about the business viability and growth opportunities may be telling the business owner about what real value lies in their business.
At some point, the owner will want or need to take a break from the business…whether due to vacation, illness or any myriad of issues that might keep him out of the office for a short or long period. Without provisions in place to sustain the business in the owner’s absence, the business value will be diminished, leaving both liquidity and investment at risk.
It’s important from the “get go” for the small business entrepreneur to ask the hard questions about their future and the future of the business they are creating. They should formulate a road map to an eventual exit plan; doing so will provide focus and direction for the owner. It will also allow an owner to develop plans to motivate and retain key employees in consideration for top seats in the event that the business is transferred to the management team or sold outright to a third party.
A small business owner should decide early on who will run the business if and when he leaves, but in order to come to that determination, exit options must be considered. Regardless, if the plan is to some day transfer ownership to the management team or sell to a third party, the owner must take measures to include those key individuals on decisions that will affect the business’s future and incentivize those key employees to work with the owner to build the business value.
For instance, the person in charge of operations should be given the authority to set production policies and be incentivized to control costs and develop efficiencies. By sharing authority and decision-making responsibilities, the owner begins to make the business capable of operating in his/her absence and if a business can operate successfully without the owner present, that business is being positioned for the future and increasing its potential value.
Look at it as a simple equation. One person in charge creates a weak link to the future as all responsibility rests with that individual. But a business overseen by several top-notch employees has a process in place that can better build productivity and cash flow…in addition to adding value to the table when the time comes to sell the business.
Ultimately, your business is an asset on your personal balance sheet; an eventual buyer or successor will be more interested in the value built in your business, not the paycheck you derived from it.
The time spent now to preserve and increase your company’s value will pay off… in both the short and the long run.
About the Author:
Bob O’Hara, CPA/PFS/MST/CPexP, is President/CEO of O’Hara & Company, founded in 1995 to address the growing need for entrepreneurs to create a comprehensive exit strategy for their businesses. O’Hara & Company hosts an educational website for business owners at http://www.exitplanning-edu.com. The company is located at One Olde North Road, Ste. 101 in Chelmsford MA. For more information, visit http://www.oharaco.com.
Category: Business Tips & Resources
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