Are You an Active or Passive Investor....In Your Company?
I am a Passive Investor in the stock market – I use the “park it and forget it” approach. Active investing seeks to outperform the market and requires paying constant attention to the market, in order to buy and sell specific securities at just the right time to maximize your gain.
Every business owner benefits from the income they receive from their business, however, the business is not viewed as an asset. Yet, for most business owners, the most significant asset in their portfolio is their business and often plays an important role in the owner’s ability to retire. The ability to sell the business for a good price is critical. Unfortunately, many owners adopt the passive approach to increasing the value of that asset, and are left disappointed when the time comes to “cash in”.
Here’s what can happen….. You start a business and learn to deliver excellent products or services to your clients at a good profit. As your business grows, you do more of the same and your income increases. You have succeeded! Before long, you are at the hub of a bustling, successful business and enjoying the fruits of your labor.
However, you may have built income at the expense of building the asset. When the time comes to sell/transfer that business, it may have minimal value – because you’ve been a passive investor – you’ve worked in the business, but not on it. So, you may rightly ask, “What does an active investor look like?”.
First, let’s talk about mindset – an active investor sets a goal /target for a future transaction and proactively works to hit those targets. Likewise, active business owners must envision a desired future and act to hit that target. It is an on-going process of assessing where you are, setting new goals and taking steps to hit those goals.
Next, we need to understand value and what drives it - then invest. Here are some simple questions/steps to make the change:
1. Assess your current value - what is your business worth? Is it sellable? How would the market view your business? Get a professional 3rd party opinion.
2. Assess your role - Is the business dependent on you? Do you run the say-to-day operations or do you have a team that can run the business without you? Start building a team one step at a time, and plan to delegate.
3. Improve cash flow - Is your business profitable? Do you invest back into the business? Do you seek to improve your cash flow? Assess your current performance and identify areas for growth.
4. Plan for growth - Do you have a plan for growth? How could you expand your business? Understand your market. Set a 5 year goal that is possible and make a plan to get there.
5. Diligently Manage your business – do you have access to all the information needed to run your business? Do you routinely (monthly at a minimum) assess budget vs actual performance, and make adjustments?
Rinse and repeat – It is rare to win the “Business Lotto” where you succeed overnight. Growing busines value is a slow and steady process that requires purposeful, routine repetition of the above steps. Each situation is different and your time is limited, but the simple steps over time will yield benefits. An annual “state of the company” assessment, quarterly goal setting/revision, and monthly management reviews will develop a manageable “more active” approach.
The fact is many businesses are not sellable – but those that take the “active approach” will walk toward the exit with “eyes wide open” and maximize the probability of a successful sale.