I had the privilege of speaking with a group of investments managers last week. One of the points I emphasized was that most business owners are terribly undiversified and the largest asset they own is the investment in their closely held business. To make the diversification worse, the business is also the sole source of their income too.
So, how do you monetize the investment you have in your closely held business? And how do you diversify your income at the same time? There are four things you must know:
1) Have employment agreements in place for key people with stay pay. You’ve invested a lot of time and effort in getting the right people doing the right things and doing them right. When you sell the company, you want those people to continue for a period of time under new management. If these agreements aren’t in place, then you run the risk of your company taking a hit in valuation because of it.
2) Document policies and procedures. Much of your efficiency and effectiveness is tied to having policies and procedures in all areas of the company, sales, operations and finance. Having those in writing will enhance the value of your company when you’re ready to exit. Not having these in place will create guesswork for new management or leave things open to interpretation when your company is acquired.
3) Get reviewed financial statements or possibly an audit for the past 3 years. Financial statement quality is critical to your valuation in a sale because of the level of scrutiny provided by an independent CPA. It’s the same concept of getting an independent appraisal when you buy a home. Without reviewed or audited financial statements, you run the risk of the buyer questioning your accounting policies and procedure upon which the numbers were derived.
4) To the extent you can, use some of the profits generated by your business to diversify your wealth away from your closely held business. The principle of diversification of wealth teaches that if you have asset concentrations re-balance your wealth away from that concentration by buying other assets. If you can, use some of the wealth you create and invest away from your business by buying marketable securities, real estate or other assets. In this manner, you will over time diversify your wealth away from your business and create other income sources to diversify your income away from the business too.
Following these things can go a long way towards maximizing the value of your closely held business when you’re ready for a sale and diversifying your wealth and income too.