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Equity - A Waiting Game

When you get down to some basic tenets of business, there is a central purpose. That purpose is to provide a satisfactory return on the owner’s investment. That means equity, and how much your investment is really worth. And for many small business owners, the question is when is a good time to cash out on the equity and maximize the profit.

A business owner often thinks of value as representing the money he has invested through his years of ownership. Some also limit their value to tangible items such as equipment and inventory. These factors are important, but they have value only to the extent that they contribute to future profits. An owner may have invested $40,000, the tangible assets may have a current worth of $20,000, but it is the profit potential that establishes the value of the total business.

And that is the key to assessing equity. The future profits are why a buyer may want in, why an investor might want to put cash on the line to help you grow the franchise. The most important projection to be determined in the projected income statement is future sales figures. The data for projecting sales will come from past sales records of the business. The more accurate and systematic these records are, the more confidently they can be used in estimating future sales.

So get your accountant to come up with a figure on how much the business is really worth. Most think of businesses in terms of being bought and sold, about lawyers and investment bankers, and being purely about economics. But in small family companies, it’s much more about spending time with and getting to know people and really building trust, rapport, and developing relationships.

Deciding when to sell is all about timing. Is the economic market for your business in a growth cycle that can be capitalized on? Are you, as a business owner, interested in selling to a family member to keep the business in the family, or are you interested in getting investors to buy the equity that has built up? And a key consideration is to determine the return you would get if the money was invested elsewhere — in stocks, bonds, or other business opportunities.

If you want to sell and get some worth from equity, be aware that negotiation has to be entered into with some caution. Value refers to what a business is worth; price refers to the amount of money for which ownership is transferred. There is usually a difference between price and value because the buyer and seller will differ in how much the business is worth. But discussion between buyer and seller should focus on the future profit performance of the company. Consequently, identifying and analyzing risks involved in future operations can make discussions between buyer and seller more significant. These two points will help bring negotiations about value toward a mutually acceptable price.

Determining when to sell or when to gather some investors is a difficult task. Timing is everything. But doing it with a practical approach — and having a good relationship with the buyer or investors — can make the process work for all parties.

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