Are you building equity for your business? Many business owners and leaders often think of profitability and equity interchangeably, but while profitably builds equity, they are not the same. While profitability is merely an income stream, equity is an asset. Simply put, business equity is the value of your business assets after deducting your business’s liabilities. Your business equity represents the value of your business to potential buyers, investors, and others interested in your business. Equity can be expanded and used to drive additional value into your business. Focusing on building equity will change how you make operational decisions to increase the value of the business. Both owners and leaders in a company should focus on consistently building equity for their business.
Types of Business Equity
Building equity in your business means creating transferable value for the future. Business owners and leaders who focus on building equity understand that the business is more than a job; it’s an investment. When we talk about calculating equity and the value of a business’ assets, it’s important to include both tangible and intangible assets. Tangible assets are often easier to calculate; they are things you can touch like inventory, machinery, or property. Intangible assets include the company’s reputation or brand identity.
Intangible assets are usually built up over the years. Through years of advertising and consistently providing good customer service, a company’s brand can come to have an inherent value, often called brand equity. A customer picking up a brand-name item instead of a generic item illustrates this kind of intangible equity. The generic item may cost less, but the customer has trust in the brand-name item. Building equity means increasing both your tangible and intangible assets.
Strategies for Building Business Equity
Equity can increase in two ways, by lowering your liabilities and by increasing your assets. Lowering your liabilities usually means paying down a loan. Increasing your assets can happen in a variety of ways, such as the value of your commercial property increasing, your client base growing, or franchise opportunities arising. Anything that increases the value of your business can also increase your equity. It’s often helpful to first determine the current value of the business when uncovering strategies to grow your business equity. Even if your current equity is zero, it provides an opportunity to review your liabilities and assets and identify areas for growth.
Business leaders can work to identify both short-term and long-term business goals. Perhaps you have a surge of uncollectible receivables. You may choose to reallocate resources to reverse this trend. Maybe your sales have been lagging in one area of your business, so you focus on growing other higher-profit margin areas. You may want to upgrade your equipment, purchase new machinery, or acquire additional property.
Instead of having to wait until you save enough capital to purchase important equipment, a business can access their equity and grow their business sooner. Business owners and leaders can use their current assets to grow their business and build even more business equity.
The most common way to access your equity is through a business equity loan. The value of your commercial property typically secures these loans, and commercial property owners will need to prove the business value of the loan. Business equity loans usually offer a flexible line of credit to provide funds as needs arise. You can pay down on the loan and then redraw on it up to a set limit when you need it, or when an opportunity arises.
Specific Strategies for Business Owners
Business owners have a unique role in building equity, and that involves taking a hard look at their role within the organization. A business that depends on the owner to be the creator of all the business activities will have very low equity when the owner steps away from the business. Business owners shouldn’t be the primary source for attracting new clients, managing those clients, and taking care of all the other day to day business operations, including things like payroll and accounting.
Rather, a business that has an owner that is an overseer of the activities within the organization, and is not critical to the running of the business, will have a higher equity because a new owner can easily see themselves taking over the business. Business owners need a management team around them that they can depend on and should consider outsourcing tasks like payroll. It’s also important for business owners to review their business contracts. Contracts need to be made with the company, and not tied to the owner so that they can transfer in the event of new ownership.
Start growing your business sooner rather than later. Start by identifying the current value of your business and then working on identifying areas for growth. Build equity in your business by leveraging your assets to their full potential. At Safeguard, we’re here for you with the solutions you need to market your business. Contact your personal Safeguard advisor today to get started.