By Michael Torney, J.D., CFP®, LL.M., CEPA
Business owners face a unique challenge that most employees or sales contractors do not. Their lifestyle is funded by their business yet most of their net worth is tied up in the equity of the business. They have invested most of their time and money into the business and need to harvest that value at some point. This paper examines how a business owner can identify the value in their business, identify the opportunities to grow their value, and how to harvest that value at a time of their choosing.
First, a business owner must identify what their business is worth. Each owner should work with a proper advisor trained to perform an enterprise value assessment (EVA). The assessment is a business valuation correlated to personal, financial, and business attractiveness and readiness assessment to determine where the company lands within a range of value. This process also allows an owner to understand the business owner’s three gaps: profit gap, wealth gap, and value gap. An EVA takes into account tangible and intangible parts of the business, industry norms, and the owner’s personal and financial goals/status.
At the end of an enterprise value assessment, it should be clear
1) what the business is worth today compared to the best in class companies
2) what the owner needs (after-taxes) from the sale/transition of the business
3) what steps the owner needs to take to close that gap
4) how ready the owner is personally for a transition
This analysis should be done on a regular basis; at least every few years and ideally on an annual basis. The analysis is important whether or not a business owner is looking to exit their company. Why? The analysis shows an owner where they are falling short in “best in class” standards. Being best in class in a variety of areas, some tangible and some intangible, is helpful to a company trading on the high end of value. Without a baseline understanding of where you stand, it’s hard to know what to focus on. Yes, there are lots of things a business owner must focus on to improve revenue, customer relationships, employee issues, etc. But those things are not the same things as a business’s value. When done correctly, acting on the issues brought out with an EVA will create more current income to the owner and increase the value of the business.
© 2024 Advisory services offered by Moneta Group Investment Advisors, LLC, (“MGIA”) an investment adviser registered with the Securities and Exchange Commission (“SEC”). MGIA is a wholly owned subsidiary of Moneta Group, LLC. Registration as an investment adviser does not imply a certain level of skill or training. The information contained herein is for informational purposes only, is not intended to be comprehensive or exclusive, and is based on materials deemed reliable, but the accuracy of which has not been verified.
Trademarks and copyrights of materials referenced herein are the property of their respective owners. Index returns reflect total return, assuming reinvestment of dividends and interest. The returns do not reflect the effect of taxes and/or fees that an investor would incur. Examples contained herein are for illustrative purposes only based on generic assumptions. Given the dynamic nature of the subject matter and the environment in which this communication was written, the information contained herein is subject to change. This is not an offer to sell or buy securities, nor does it represent any specific recommendation. You should consult with an appropriately credentialed professional before making any financial, investment, tax or legal decision. An index is an unmanaged portfolio of specified securities and does not reflect any initial or ongoing expenses nor can it be invested in directly. Past performance is not indicative of future returns. All investments are subject to a risk of loss. Diversification and strategic asset allocation do not assure profit or protect against loss in declining markets. These materials do not take into consideration your personal circumstances, financial or otherwise.
