Does Your Business Pay What YOU Are Worth?
What do you think YOU are worth?
Is it just what you pay yourself? Or do you truly believe you have a much greater value? Does your business pay you this value now? Can your business pay you what you’re worth in the future?
Most business owners start life out thinking they can do something better than others. They believe they can create more value by doing it better than others, providing better service or better products or many other reasons.
But then reality takes over, and they get swallowed up in the daily grind of doing business and often lose sight of the vision they had when they first started. The routine starts, crises happen, jobs mount up and you end up spending too much time working in the business and not enough time working on the business.
This is when the PERCEPTION of the value of the business gets reduced to your pay packet. And often the pay packet doesn’t justify the stress, the time and the other things you miss out on to keep everything going.
So what went wrong?
What happened that changed your vision of wealth to the reality of a much lesser value? And more importantly what do you have to do to achieve your vision of wealth?
There are six key steps you can follow to help you get back to creating the wealth you dreamt about in the first place. Knowing the right steps to do at the right time is critical to success.
Step 1: Reality check
Was there one single event or reason why your business is not generating the value you are worth?
If there was a single event or reason, then it was most likely an external event that you had little influence or control over. It could have been an oil price increase, a global financial crisis, changes in technology or changes in what the customer demands. Either way, it has happened, so you need to plan how you will adapt.
Document what your business was doing in terms of sales and profits before the event, and how it is performing now. Identify the gap you have to close and think how that can be achieved.
Often this will require looking at the issue from a different angle – you may not be able to fix the usual global financial crisis on your own, but their may be ways to restructure your business to better deal with the new situation.
Step 2: What are you paying yourself now?
Many businesses simply pay the owner a wage, and possibly some extra cash or “flexible arrangements” to include a car or perhaps a beach house or boat or something extra. But this is hardly a suitable reward for the risk of investment. Nor is it building any long term value.
The wage is payment for your management services. The dividends and/or capital value of the business is the owner’s reward for taking on the risk in the first place.
What have you paid yourself over the time you have owned your business, excluding an acceptable wage? Does it cover the risk of your investment?
Step 3: What value do you want?
Sometimes this is as simple as doubling the first number you thought of, or asking what you need to retire. However there are some other methods you can follow.
What have you put into the business in terms of your own investment? External investors, such as venture capitalists, look for a 3-5 times multiple of their investment over a two or three year period. This is not a bad measure for you to adopt, but perhaps over a longer time frame.
Remember doubling your investment over a five year period is really only a 15% growth rate, which doesn’t provide much premium for the risk you take on as a business owner. You should really be aiming for a much higher return on your investment.
Step 4: Do you build the value or take it now?
The Australian economy has shifted over the last decade to a more service-based economy, and as such the nature of how a business creates value has changed. Service-based businesses have less of a requirement to build financial equity, and in many cases the business will not have significant value when the owners or key people leave.
In these cases the owner should make sure they are making sufficient profits to take as dividends and grow their personal equity, rather than re-invest in the business. The dividends are necessarily different to the wage the owner is paid, as this is remuneration for the owner as a manager in the business. It is separate to the return for investing in the business.
This doesn't mean service-based businesses should not invest profits back into the business - they should as long as that investment will provide a growth in value for the owner. In most cases the investment should result in increased profits that can be taken as future dividends.
In other cases, the business should be developed to provide a suitable return on investment when it is sold. This will require ongoing investment in new plant and equipment, new tehcnology or new products and services. Whilst the dividends should provide a suitable ongoing return, the growth in capital value is the real “golden egg” that the owners should aim for.
Step 5: Exit strategies
Every business owner should have an exit strategy of some description. It may be as simple as “close the doors, pack up the office and leave”. But preferably it is a set of steps you plan for that ensures an orderly transition from your current business to the next destination.
Preparing for this transition now gives you the best opportunity to unleash the value you may have in the business. It may involve making sure your debts are paid and all your invoices are collected by a certain date. It may be more complex and involve identifying potential buyers; systemising the business; building the brand and preparing your documentation to present the business in the best possible light .
No matter what the intended exit plan is, you should document how and when it will happen and how you should approach it so you capture the most value in your pocket – not given away to others.
Step 6: Is the payout worth it?
Now you have worked out what profits you pay yourself on an ongoing basis, and the likely value of the business when you exit, the critical question to ask is "Is it all worth it?" Should you take the money out of the business now or wait till you sell the business? Am you getting the right return on your investment? Am I better finding a job with a secure salary?
To answer these questions you need to convert all your future payments to present dollars and make a comparison against what you would earn from employment, and what the cost of the capital is that you have invested in the business. These calculations will tell you if you're creating value and what the difference is between the return you get from your business and the money you get from employment.
Remember you also gain intangible benefits from operating your own business, and whilst these can never be ignored, they can rarely be calculated precisely. Only you can answer the question "Am I really getting what I want for my effort?".
What Next? A Value Creation Plan
Many business owners have some form of plan for the ongoing development of the business, but few have documented how they will create value in the business and even less have documented their exit strategies.
You may have answers to some or all of the questions above worked out in your head, but nothing stirs more action and motivation than writing it down in black and white. Using a simple one-page structure can highlight the key issues you need to address such as:
Write the answers down in a simple plan and then decide on what it means and what you will implement now to address your issues and concerns.
- What are you being paid now?
- What is the exit strategy?
- What is the potential value at the end?
- What is the return on investment and is it creating value?
Use the six step process described here to give you the best chance to capture the hidden value in your business.
Maxell Consulting has helped many businesses identify the value in their business and empower the owners to develop plans to crystallise that value.
We offer a free assessment of your situation and review what potential value exists within your business.