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You know as well as I do that your involvement with your business is anything but permanent. Circumstances such as age, health, or the simple desire to do something else will eventually separate you from your business. If youve come this far without having the end in mind, then you need to start asking yourself a very profound question: What is your exit strategy? When the time comes, how will you leave your business behind? Will you sell it? Shut it down? Deed it to your heirs?
If your plan is to sell your business then you need to ask yourself the following question: Are you building equity in your business or are you merely generating cash flow? The answer can have significant ramifications.
Imagine starting a business and working it all your life with the idea of selling out come retirement time and living on the proceeds. Now imagine your shock and devastation at learning that you cant sell your business for anywhere near what you thought it was worth because you failed to build equity. This real-world horror story happens to far too many entrepreneurs after a lifetime of toil. Not quite as bad, imagine thinking you can sell Business A to buy Business B or fund some other endeavor only to be rudely surprised.
Building equity in your business is the process of building lasting value that can be transferred to anyone once youre done with it. One of the key elements in building value lies in creating and refining products, methods, and systems that dont rely on specific people out carry them out. Fast food franchises are the perfect example. Anyone can prepare a Big Mac anywhere on the planet with perfect consistency. Ive eaten Big Macs on four continents as part of a long-running experiment and I have yet to tell the difference. If Ray Kroc was the only person on the planet who could prepare the perfect Big Mac, then he could never have spawned the worldwide McDonalds franchise. Sure, his burger joint could have earned a pretty penny in his day, but it would never have built the same kind of lasting value.
Think about your business. If it depends on you plying a unique skill or trade, then you may not be building much equity. Case in point: A few months ago I was considering purchasing a résumé-writing service with the idea of using it to expand my coaching practice. I did a little digging and found that the owner was doing most of the work while farming a little out to a handful of longtime contractors. This business was based on referrals, meaning that her customers liked her unique writing style and approach, which no one else can ever duplicate. There is no way that business was worth its asking price, which the broker derived using standard valuation models that are incapable of taking such factors into account. It would be both easier and at least 99% less costly to start my own résumé-writing service. I feel sorry for that woman.
You can avoid this trap very easily by taking a good hard look at your business and asking yourself whether its value comes from what it does or from who is doing it. If the former, then you may indeed be on the path to building equity that you can later cash out to fund your retirement or other pursuits. If the latter, then you are probably generating profits while building little or no lasting equity for you to sell.
Its perfectly OK for you to be in a business that is generating cash flow but no equity. The key is for you to realize such a business for what it is so that you wont base your plans around value that wont be there when the time comes. In this situation, consider setting aside a portion of the profits in investments, savings, annuities, etc. that will be there when the time comes. The time will come. That much is certain.
Never forget that your business exists to serve you, not the other way around. It would be a tragedy for your business to stand beside you only to abandon you when you need it the most.
I urge you to seek expert advice from several sources to help you determine which path you are on and how best to use that to your advantage because leaving your business should be just as exciting and joyful as starting and operating it. You deserve nothing less.
If your plan is to sell your business then you need to ask yourself the following question: Are you building equity in your business or are you merely generating cash flow? The answer can have significant ramifications.
Imagine starting a business and working it all your life with the idea of selling out come retirement time and living on the proceeds. Now imagine your shock and devastation at learning that you cant sell your business for anywhere near what you thought it was worth because you failed to build equity. This real-world horror story happens to far too many entrepreneurs after a lifetime of toil. Not quite as bad, imagine thinking you can sell Business A to buy Business B or fund some other endeavor only to be rudely surprised.
Building equity in your business is the process of building lasting value that can be transferred to anyone once youre done with it. One of the key elements in building value lies in creating and refining products, methods, and systems that dont rely on specific people out carry them out. Fast food franchises are the perfect example. Anyone can prepare a Big Mac anywhere on the planet with perfect consistency. Ive eaten Big Macs on four continents as part of a long-running experiment and I have yet to tell the difference. If Ray Kroc was the only person on the planet who could prepare the perfect Big Mac, then he could never have spawned the worldwide McDonalds franchise. Sure, his burger joint could have earned a pretty penny in his day, but it would never have built the same kind of lasting value.
Think about your business. If it depends on you plying a unique skill or trade, then you may not be building much equity. Case in point: A few months ago I was considering purchasing a résumé-writing service with the idea of using it to expand my coaching practice. I did a little digging and found that the owner was doing most of the work while farming a little out to a handful of longtime contractors. This business was based on referrals, meaning that her customers liked her unique writing style and approach, which no one else can ever duplicate. There is no way that business was worth its asking price, which the broker derived using standard valuation models that are incapable of taking such factors into account. It would be both easier and at least 99% less costly to start my own résumé-writing service. I feel sorry for that woman.
You can avoid this trap very easily by taking a good hard look at your business and asking yourself whether its value comes from what it does or from who is doing it. If the former, then you may indeed be on the path to building equity that you can later cash out to fund your retirement or other pursuits. If the latter, then you are probably generating profits while building little or no lasting equity for you to sell.
Its perfectly OK for you to be in a business that is generating cash flow but no equity. The key is for you to realize such a business for what it is so that you wont base your plans around value that wont be there when the time comes. In this situation, consider setting aside a portion of the profits in investments, savings, annuities, etc. that will be there when the time comes. The time will come. That much is certain.
Never forget that your business exists to serve you, not the other way around. It would be a tragedy for your business to stand beside you only to abandon you when you need it the most.
I urge you to seek expert advice from several sources to help you determine which path you are on and how best to use that to your advantage because leaving your business should be just as exciting and joyful as starting and operating it. You deserve nothing less.