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The Four Kinds of Capital in Business Valuations

Posted March 31, 2023

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When you started as an entrepreneur, was the first draft of your logo just a chicken scratch on a napkin? Is the first dollar you ever made hung in your office to remind you of your humble beginnings? How many hours would you say you’ve poured into your business over the last 20, 30, or 40 years if you could count? Do you ever pause and take stock of how far you’ve come?

As a business owner, you have a lot to consider. It’s not just your livelihood and dream, but you’re also responsible for the livelihoods of your employees. You indirectly put food on their tables, keep a roof over their head and help them live a full and successful life. It can be a lot of pressure.

So, it can be a difficult transition when you see the time coming for you to step away from the business you’ve built from the ground up. You want to ensure you leave your business and legacy in the right hands. The first step is to know how much your business is worth.

If someone asks you how much your business is worth, you may go on autopilot and reply that it’s priceless. While yes, it may be priceless to you, that’s not the answer most people seek.

If you aren’t sure about the value of your business, you aren’t alone— nearly 98% of business owners don’t know the worth of their business. With 80-90% of a business owner’s net worth tied to their business, this is not a question you can afford to get wrong. The value of your business will impact your future retirement plans, estate planning, wealth building, business transition, and more.

There are four types of capital to consider when looking at your business valuation.

Human Capital

Over the years, you’ve likely cultivated a team of people you trust with your business. These people can be your greatest asset. If you’ve built a strong team of reputable and knowledgeable industry leaders, a new owner will already have a firm foundation when they step in. However, suppose the majority of your team is also approaching retirement, or are unreliable and not motivated to continue pushing the business forward; this is a lower value of human capital and often a red flag for potential investors.

Structural Capital

One way to conceptualize structural capital is by considering it as a set of business procedures. Do you have standard operating procedures? Are playbooks, guidelines, and systems in place to ensure a smooth transition? Is your human capital capable of carrying out these procedures? If you have processes in place that will allow for work to continue seamlessly while there is a transition in ownership, this boosts your structural capital.

Customer Capital

A prospective new owner will want to know about your client base. How large is your client base? Is it diversified? Is there a healthy mixture of legacy clients and new clients? Expanding your customer base can reinforce the solidity of your enterprise and its prospects going forward.

Social Capital

Not only do you need good employees, a seamless flow of processes, and a robust client base, but you also need to have a good reputation within the community. Are you known for giving back to the community, providing a healthy work culture, and maintaining ethical practices in all you do? Or are you known for high turnover rates, questionable ethics, and never truly being a part of the community? As a small business owner, the importance of your company’s reputation within its community cannot be overstated.

When you first created your business goals, you may not have mentioned human, structural, customer, or social capital. But over the years, and especially now as you look to retirement, these four aspects are of the utmost importance.

At Thayer Financial, we understand how important it is to know the worth of your business and how to build a retirement plan around it. So, we’ve invested in technology and partners to help ensure our business owner clients have the facts needed to make sound planning decisions.

Thayer Financial is ready to advise you on your business transition plans from a comprehensive financial planning and wealth management perspective. As Certified Exit Planning Advisors in Hickory, North Carolina, Thayer is your dedicated resource for fee-only, fiduciary advice. Schedule an appointment or call us today.

Thayer Financial, L.L.C. (“Thayer Financial”) is a registered investment adviser offering advisory services in the States of North Carolina, Tennessee, Texas and in other jurisdictions where exempted. Registration does not imply a certain level of skill or training. This website’s presence on the Internet shall not be directly or indirectly interpreted as a solicitation of investment advisory services to persons of another jurisdiction unless otherwise permitted by statute. Follow-up or individualized responses to consumers in a particular state by Thayer Financial in the rendering of personalized investment advice for compensation shall not be made without our first complying with jurisdiction requirements or according to an applicable state exemption.

All written content on this site is for information purposes only. Opinions expressed herein are solely those of Thayer Financial, L.L.C., unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made by our firm as to other parties’ informational accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation.

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