Want to get your business in shape? Think about selling it. Every day.
That’s the advice of Tom Smith, a principal with Smith Evans Carrier, a business evaluation firm.
“A business is like an automobile,” Smith says. “It can’t run by itself unless it’s going downhill.”
Managers at publicly held companies have a clear notion at any given time of the value of their company simply by looking at their stock price. For private businesses, the value changes, but it’s more difficult to quantify.
Too many owners of privately held companies don’t have a clue what their business is worth or what the return on their investment is, says Smith, although they are investing in it every day with their effort and their assets.
“You need to know the market value of your business because you need to know the value of your investment,” says Smith.
Clearing up legal matters, reviewing leases and contracts and maintaining hard assets are key to maximizing your business and keeping it in shape to sell, whether you’re ready to do so or not, Smith says.
Too often, Smith says, business owners don’t know if the return on their investment is commensurate with the level of risk they are assuming in their business. As with any investment, the higher the risk assumed by a business, the higher the rate of return it should command.
And while it is difficult to quantify the value of assets such as human resources and customer and supplier relationships, Smith says it pays to make sure that they are maintained, just as a piece of capital equipment would be.
Smith recommends that business owners determine the value of their business and its return on investment, then run it as if they are going to sell it.
Standard financial statements don’t provide an accurate picture of the value of a business, he says. Instead, he recommends metrics that reveal:
* The true economic return of the business and the factors that affect it
* The risk-adjusted required rate of return on investment
* The market value of the business
* Whether the business is increasing or decreasing in value
Says Smith: “Running your business like you’re going to sell it makes you focus on your strengths, your weaknesses, your assets and your risks.”
How to reach: Smith Evans Carrier, www.smithevanscarrier.com