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Written by: Scott Snider | Exit Planning Institute
Owning a business comes with its fair share of risks, big and small. But the most fundamental risk hinges on the value of the business. That’s why you should make it a priority to grow and harvest the value in your company over time by incorporating the Five Stages of Value Maturity into your business model. Although many of the steps to building value are inter-related and ongoing, in its simplest form, the path to value maturity consists of these five stages. These stages incorporate the core concepts of the Value Acceleration Methodology followed by Certified Exit Planning Advisors (CEPAs). Successfully progressing through these five stages can transform a business from one that simply exhibits year-over-year success to one that is ready to be sold at an attractive valuation.
Identify
If you are like most business owners, roughly 80%-90% of your net worth may be locked up in your business. Whether you are just starting to think about retirement or what else you will do after you are no longer running the day-to-day operations, your ability to fund your next act will depend on your ability to unlock that value at some point in the future. In the first stage of value maturity, you need to identify the baseline total value of your business. An initial professional business valuation will help you quantify hidden value and provide an objective assessment of the market price of your business. Conducting a business valuation each year will help determine what factors to focus on to accelerate the value-building process most effectively. A valuation highlights areas of risk, reveals improvements, and most importantly, helps ensure you are on track to achieve your goals.
Protect
After identifying your baseline business value, you must protect that value by mitigating the risks associated with it. Work with your advisor to create a comprehensive action plan to address short- and long-risks in three categories: personal, financial, and business. At this stage, a key priority should be ensuring that your business can be run effectively even when you are no longer at the helm. By decentralizing your role in the present, you take a significant step toward preparing the business for your eventual exit in the future. That means having written procedures, detailed financials, and a customer base that is not solely your own responsibility.
Build
Once you have put pieces in place to protect existing value, you can shift your focus to building value. One of the key drivers of value is the strength of the intangible capital in your business, which take the form of human, structural, customer, and social capital.
- For the majority of owners, finding and retaining top talent is the biggest challenge they face. Your employee development plans should prioritize development of this human capital to encourage growth in your employees and your business.
- The strength of your social capital rests on the strength your organization’s vision and core purpose, and to the extent these are embodied in your employees and demonstrated in the day-to-day operations.
- Customer capital is more than goodwill, and translates into the lifetime value of a customer, which has ongoing financial value to the business.
- The most robust of all intangible capitals is structural capital. It encompasses everything that makes your company work efficiently – including its processes, documentation, training programs, technology, tools, equipment, and real estate.
Harvest
After building your business value, it is time to harvest the fruits of your labor through the business exit. Because that exit can take many different forms, you should carefully review your options with an investment banker and a business advisor to determine which path will allow you to maximize what’s most important to you. For example, you might discover that the best option isn’t to sell your business on the open market, but to transition the company to one of your adult children. Or you might sell only the real estate and retain the rest of the company assets. Or you might decide to put off a sale until you can build additional value in the business.
Manage
You most likely manage value throughout the life of your business, but it’s especially critical when it comes time to exit. At that point, achieving a successful outcome requires managing not only business value, but your personal financial value as well. You’ll need to devise a plan for continuing to build and preserve the wealth generated by the sale so you can achieve your financial goals and your vision for what your future will hold.
Related: Growing the Value of Your Advisory With a Successor
Scott Snider is the president of Exit Planning Institute and a nationally recognized industry leader, growth specialist, and lifetime entrepreneur.