25 Questions for Business Owners
Perspective from Mercer Capital’s publication Unlocking Private Company Wealth
The following is a list of 25 questions to think about in assessing whether you as an owner are treating your business as an investment. If you are a business adviser, you can ask the questions on your clients’ behalf or, better still, in meetings with them.
- How much is your closely held or family business worth?
How much is your interest in the business worth if you own less than all of its shares (or other interests)? Having asked the question, the truth is that what you think doesn’t matter. All that matters is: 1) what a buyer of capacity thinks if and when you are ready to sell your business; or, 2) what a qualified valuation professional thinks in the interim and will express in a valuation report for an ESOP, a buy-sell agreement, a gifting plan, for the estate of an owner, or whenever independent corroboration is needed for interim transactions. - How do you know what your business is worth? Has it been independently valued in the last three years?
I recommend that every successful closely held and family business have an appraisal each year, or at least every other year. If you do this, you will have the best information available about the value for your private company. - What portion of your personal net worth is represented by your business ownership interest?
If you will just make a calculation with whatever estimate you have of your company’s worth in relationship to your other assets, you will likely be surprised at how concentrated your wealth is. Investment concentration is a red flag for investment advisors; it should be a concern for every business owner. - What has been your shareholders’ rate of return on their investment over the last one, two, three, four, or five years or more?
Return on investment (ROI) is not something that many private business owners talk about. Simply, an investment in a business provides returns in two forms, interim distributions (after taxes) and capital gains, or the appreciation in the value of the investment each year and over time. And don’t forget, above-market owner compensation and other expensive perquisites are part of your return on investment. - How does this rate of return performance compare with alternative investments, e.g., in the public securities markets?
You almost certainly know how your professionally managed liquid funds are performing. After all, you get a report from your manager at least quarterly, and perhaps more frequently. Have you ever compared your return on your business with that of your liquid wealth? You might be surprised, either pleasantly or not, if you have the information. - Is your wealth adequately diversified to avoid the risk of major losses from adverse events with any of your assets, including your business?
Rephrasing the question, if your business suffered a major loss of value, do you have sufficient assets outside the business to sustain a reasonable lifestyle? For many business owners, the answer is no. And for owners who build lifestyles based on their returns to labor (salary and benefits) and the economic distributions of their businesses, the answer is likely no. - Do you know how to increase your company’s value over time?
You have been successful so far. Do you know and are you working on things to increase the value of your business over time? Even with large, highly successful businesses, significant enhancements in valuation can occur through efforts to reduce risk, to facilitate cash flow growth, and to use the balance sheet in a prudent manner.