Have you ever wondered why you started your business in the first place? Does all the stress and heartburn pay off? Those are very important questions that we think you should consider from time-to-time. Because, at the end of the day, owning a business is difficult and involves a lot of risk.
We think that one of the greatest reasons to own a business is to build a great team that makes a positive impact on people. That’s in fact, why we do what we do at WCM. We want to positively impact people by giving away $1,000,000.
For many other business owners, they want to build a company that is valuable that can be sold as part of a retirement strategy or handed down to heirs. This is a noble pursuit that requires intentionality, but many business owners overlook two major aspects of building business value. Here is a story about a business owner who found the Truest Value in Her Business.
Maria has loved people for as long as she could remember. Even when she was a little girl she would set up her dolls at her kitchen table and play family, or house, or even school. This has always been her passion. It was no wonder when Maria grew up and decided to start a staffing company after college. She had her degree in human resources management and she had a heart for helping folks find good jobs.
The beginning years of her business were tough. Maria worked to build relationships with local businesses to bring in more clients. Meanwhile Maria’s husband paid the bills with his steady job in the school district where their three children attended. Over several years, Maria began to start making enough money to pay the rent and other expenses at her local office. At this time, she began to feel confident that this company would become self-sufficient.
It surprised Maria one day when a competitor approached her about buying her business. At first, she was shocked, but then started to consider what it would take to make this business an investment. Realizing that Maria wasn’t interested in leaving her clients, she respectfully declined the offer and continued to work in the business.
A few years later, Maria’s staffing company had doubled in size and was providing a little bit of income to her family. Maria worked hard and often spent long nights keeping up with the bookkeeping and paperwork required to stay in compliance. Sometimes Maria wondered if all this work was worth the meager salary she was making. The whole business was on her shoulders, but she didn’t know if she could hold the weight forever.
Then one day Maria got another call from the competitor that had contacted her years ago about buying her business. This time they seemed to be even more interested. This time Maria was more interested too. She now began to consider how much she was missing out on her kids’ lives being at the office so much. She also wondered how much here business was even worth.
The next day Maria called her CPA to discuss her situation. Her CPA set up a meeting with her and the potential buyer just to get some of the details out in the open and to find out how serious they were. When they met, the potential buyer was very interested and asked for a lot of financial information. They wanted to understand the value of the business. But to Maria, it was her relationships that brought value and it was so difficult for her to put a number on that.
When Maria began to look closely at the numbers of the last few years she realized that she had been making a mistake. She had been only paying herself $25,000 a year and had been using her business account to purchase personal items and vacations. She had thought that it was all her money anyway, so it really didn’t matter which pocket it came out of. Unfortunately, it did!
When the competitor looked at the financial information they began to adjust Maria’s numbers. They started by increasing her salary to a market-based wage for local managers in the area. They also adjusted the personal expenses to become distributions of equity. By the time the competitor was done with it, the staffing company was a whole lot less profitable that Maria had realized.
At the end of the day, Maria decided not to sell the business. Instead she decided to focus on growing her business and treating it like an investment. The first thing she did was hire an assistant to help her with the bookkeeping and administrative paperwork to reduce her time at work to just 30 hours a week. Then she began paying herself a market-based salary for those hours and stopped making personal purchases from her business account.
Once Maria had the truest picture of her financial situation, she then began to focus on increasing her pretax profit from 6% to 10%. Then after a couple of years, she had her passion for people back and a growing investment for her future.
From this story we have learned two important aspects of building the truest value of a business. First, the business must be managed for growth. And second, the expenses must be only for the business and at market-based rates for investors to truly understand the value.
We hope you learned about building the truest value of your business. Our team is available to discuss these and other tools that we can provide to you as a business owner.
To learn more and please contact us at 210-684-1071 or email us at firstname.lastname@example.org!