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Studies have shown that more than half of a business owner's net worth is tied up in the ownership of their closely-held business. But they spend more time and money in managing their liquid assets (stocks, bonds and mutual funds), which are easy to value and do not have the large potential for growth like their company does. They hire investment managers who assist them in the management of these liquid investments and pay them management fees of 1 to 2 percent of assets under management.

 

How can you treat your ownership in the company like the important investment it is?

 

In order to treat an ownership interest a business like an investment, consider the following:

 

  • Annual business valuations. An annual business valuation is the best way of tracking investment performance over time and examining the company's return performance relative to itself and other investments.
  •  Annual review of buy-sell agreements. There should be an annual review of the buy-sell agreement to ensure that it makes sense from a valuation and legal perspective. An improper buy-sell agreement can significantly reduce the value of your company's investment.
  •  Strategic planning. You should have a strategic plan and a firm direction on where you want the company to be in the future.
  •  Review of life insurance needs. Do you have enough life insurance on yourself and the other shareholders to adequately pay for a liquidity event?
  •  Estate planning. Annually review estate planning issues, particularly in this time of estate tax uncertainty.
  •  Financial planning. An annual valuation will help financial planners advise you with respect to asset allocation decisions for non-business assets.
  •  Audited or reviewed financial statements. Professional reporting will make the valuation more accurate and easier to sell the business in the future.

 

 

Do you treat your ownership interest as a key investment? You do if you answer yes to the following questions.

 

1.       Do you have a recent business valuation prepared by a qualified business appraiser?

 

2.       Do you know what your rate of return on their investment is in your company? How does this rate of return performance compare with other alternative investments?

 

3.       Do you know how much of your net worth is tied up in your business ownership interest?

 

4.       Is your business "ready for sale?" In other words, not that you want to sell it today, but should you make that decision, is the business positioned to be attractive to a range of prospective purchasers?

 

5.       Do you have well thought out and documented succession plan?

 

To discuss any of these issues, please contact your Rea advisor.

 

-By Tim McDaniel, CPA/ABV, ASA, CBA


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