How many business owners have stayed up late at night thinking about this question, “Am I able to retire?” It is a question I come across daily while working with business owners. Entrepreneurs get into business for many different reasons, whether it’s passed down from a relative, a retirement plan, or just the shear fact that they enjoy the freedom of working for themselves, but many don’t know how to exit their business and realize the value they built.
So why is it that so many get trapped inside their businesses? As cited in Chris Snider’s book, “Walking to Destiny” the historical successful transition rates for business owners is 20-30%. Meaning that 70-80% of privately held businesses (6 million in total in the U.S. as of 2016) will not successfully transition and will most likely liquidate their company and close forever.
When I started my business in 2015, I learned that there are two types of business owners:
- Those who work in their business
And
- Those whose business works for them
While it may not sound like a significant difference, the results couldn’t be further apart when it comes time to retire. So how do we create wealth outside of our business and unlock our true business potential? One method is Chris Snider’s “Five Stages of Value Maturity.”
1) Identify Value: If we do not know the value of our business, how do we ever expect to grow? The identify stage is imperative to building goals. Know where your business stands in the industry and create an action plan based on this value.
2) Protect Value: As a business owner the business relies heavily on you. As such, there are three main areas as an individual we must ensure are protected. Chris Snider describes these three areas as Personal, Financial, and Business. From a personal perspective, we must protect against health issues or sudden accidents. As an example, this can be done through seeing a doctor for your annual physical. From a financial perspective, we should protect against market risks or loss of earning power. This protection can be realized through diversifying portfolios or purchasing disability insurance. Finally, from a business perspective, we should put strategies and safety nets in place to minimize owner dependency while evolving with new technology and machinery. For example developing a management team can ensure ongoing operation of a business in the owner’s absence, thus alleviating owner dependency. Taking these actions is not easy but in the long-term will allow us to keep more of what we have built.
3) Build Value: After identifying and protecting our personal, financial and business value, it is time to build. Businesses build through implementing systems to grow tangible and intangible assets. The conscious effort to grow sales and technology while, at the same time focusing on de-risking the business, will increase cash flow and raise the value of the business when it comes time to transition.
4) Harvest Value: This stage is exactly what it sounds like. After all of the hard work it is time to reap the reward and collect on all that we have created. Years of sleepless nights and stress come down to this one stage (The Transition). As mentioned before, unfortunately only 20-30% of owners ever actually reach this stage. I ask you, what are you doing today to become one of these select few?
5) Manage Value: You get to the promised land and reap your harvest…so now what? If not done already it is time to plan your future. Having transitioned from your business you now face the hardest part of your financial life. The question we must all ask ourselves is, “Will my money last me the rest of my life?” Working with a financial professional is extremely important throughout every stage of your business, but is crucial in managing value if you have not worked with one yet. They can help to create longevity of money as well as strategize for future taxes and estate proceedings.
Congratulations!! You are on your way to becoming a business owner whose business works for you and not the other way around.
For Questions or to learn more on this topic contact Jon Gyles at: jon@ewmginc.com