98% of small business owners don’t know what their business is worth. You don’t plan for retirement a few months before you retire so why wait until a major life event to plan the future of your business?
When planning for the future, it is easy to feel overwhelmed by the unknown. You might not know how much your business is worth, when you should sell, where to find the right buyer, how to fetch the best price, or even how much insurance to carry.
Knowing the value of your business is the cornerstone and first step in understanding the business’s past performance. An accurate valuation allows you to determine “Where am I today?” and “How do I get to where I want tomorrow?”.
- Over 170,000 small businesses permanently closed their doors as a result of the Great Recession, and trillions of dollars deteriorated from the US equity markets.
- One of the biggest hazards for small businesses during bear markets is what’s known as the “Stock Market Effect”.
- As stocks decline, people feel less wealthy and don’t spend as much.
- Without a proper plan, a bear market may cause the destruction of many hundreds of thousands more businesses and foster an economic environment of stagnation.
For the 75% of business owners who plan to fund their retirement with the sale of their business, a proper plan in place to preserve capital, protect against suits and promote growth, is absolutely vital or else they will not have the funds necessary to survive let alone thrive.
A solid plan and adequate preparation are necessary to have in place for every business. Cash is King.
- Small businesses need cash in order to grow and rely more heavily on bank loans for working capital
- Roughly 16% of business owners have taken equity from their home and used it as collateral to finance their business.
- After the business value is understood, plans can be put in place to secure funds, prepare the business for a capital acquisition or simply save and build cash reserves for the future.
Money buys freedom and gives a business owner leverage when seeking a loan. Understanding what the value is today and laying out a business plan builds value moving forward. Capital preservation is one of the most important aspects for a business to effectively manage.
- The key is efficiency and leverage, getting processes as smooth as possible while maximizing each dollar spent.
- By stressing the importance of cost cutting and waste to the team, along with encouraging the team to bring ideas to the table around how the business can run more cost effectively, waste can be removed leaving more cash in hand.
- Lean operations are key to making it through a recessionary period and can be the difference between a happy retirement and a boarded-up storefront
Some of the greatest buying opportunities occur when everyone else is running for the hills.
- Look for opportunities and undervalued investments to scoop up as markets decline. Opportunities like these don’t come around often and to seize them requires preparation and foresight.
- Periods of economic downturn are often some of the greatest periods of merger and acquisition activity and truly distinguish the strong businesses from the weak. Planning ahead and being able to make a position on a failing operation could pay dividends later on.
- The main purpose of an acquisition is execution of company strategy and to increase the strength of the core business.
Deterioration in the US equity markets over the next two years is going to become a headwind for business owners. Without a solid plan in place to account for decreased profits, fewer capital infusions, increased credit risk and growth opportunities, it is unlikely the business will remain profitable and may even cease operations.
Preparing for the future is as much about identifying market trends and understanding your customer base as it is about knowing where you’ve been. You hope that each year, the business increases in value so that when it’s time to exit, your nest egg is secure. So then, what’s your business worth? A business valuation can help ensure you are on track to meet personal and professional goals.