Broker Check

Know what your business is worth

July 30, 2019

Many small or independent business owners expect that their business will provide them with the retirement which they desire. Many of them may be right but there is more to creating a marketable business that has a resale value as opposed to growing a business practice.

Take the example of a tradesman such as a plumber, mechanic or even a legal or medical professional. Someone who is very good at a trade can start a business, service clients and grow a practice. Many tradesmen do this out of their own home and may or may not expand into a physical location. They can build a great reputation by providing excellent workmanship in their chosen field of expertise. The tradesman can grow this practice into an ongoing income and live comfortably but, what happens when it is time to sell?

Reasons to sell a business would be retirement, death or disability. It takes planning to ensure a business is marketable and the owner and his family will be financially rewarded for all the hard work and sacrifice that went into building the business. Many questions should be asked to determine if you are growing a practice or building a sustainable business with a marketable value.

If suddenly you were not in the picture what would your business be able to continue without you? What would the business sell for? Fair market value? And what is a fair market price? Or would you have expensive equipment to sell for pennies on the dollar? Who would be a buyer and if you are able to sell would the new owner maintain the client base? Do you own the property your business operates from or do you lease a location? Would you be able to get out of the lease? These questions just scratch the surface.

A good first step is to have a business valuation from a qualified professional. There are many financial, accounting and consulting firms which will provide this analysis. This valuation would look at financials and more such as; sustainability, competitive advantages and weaknesses, industry analysis, etc.

Additionally, there are numerous factors which will help you build a marketable business. The business entity you choose is important. Sole proprietorships and partnerships may work well for some situations while others may be better off with Sub S or even a C corporation. This choice will affect taxation, liability, should be considered prior to starting a new venture and will have long term implications.

Systems and standard operating procedures can make a huge difference on the marketability of a business. If things are processed or produced haphazardly, the valuation will be diminished. On the other hand, if you have processes in place which are repeatable and scalable, the business will be able to increase efficiencies, reduce expenses and grow profits. This will increase the valuation.

Marketing is an ever-changing field and reaching your target market is more complicated than it once was but, must not be ignored. Your marketing should be well planned and executed to reach your target demographics in an effective and cost-efficient way. Word of mouth referrals are great but may not be enough to keep the valuation up for selling your business at the price an owner feels is fair. A marketing plan should be consistent with your goals, relevant to the industry and your target market.

Utilizing your personnel to the fullest is a real challenge. The Small Business Administration defines a company with less than five-hundred employees as small. Well there is a big difference to managing human resources in a company of nearly five-hundred employees compared to an entity with less than fifty or even smaller. Getting the right people in the right place is critical for smaller entities. Most business owners have a get it done attitude and may have trouble delegating. This is a common obstacle to overcome. An objective look from the outside can be helpful in making this type of personnel assessment.

In our industry, talk about succession planning is an ongoing discussion. For the record, our firm has a plan in place. A well planned and written succession plan is necessary to maintain continuity for keeping clients onboard during an ownership transition. Putting a buy-sell agreement in place is designed to make that transition smooth while making sure the business owner and his family are protected financially.

A business which has the above elements working in synch is much more likely to be a marketable entity and help ensure a business owner enjoys the retirement which he or she has planned. Remember to use your team of professionals and until we talk again, be well.

Registered Representative offering securities and advisory services through Independent Financial Group, LLC (IFG), a registered broker-dealer and investment advisor. Member FINRA/SIPC. Dedicated Financial & Insurance Services and IFG are unaffiliated entities.