In every small business, you'll find assets, both tangible and intangible. Tangible assets are the things you can touch and see, like machinery, inventory, raw materials, and vehicles. Financial statements that reflect past financial performance also fall into this category because they provide an objective snapshot of the company's financial history. Tangible assets are concrete and measurable.
On the other hand, intangible assets are less concrete and harder to measure. They encompass factors like team morale, the strength of the business's brand, the value of existing customer relationships, and the effectiveness of the various systems and processes used for day-to-day operations. These assets are more subjective in nature.
It's worth noting that the skills required to manage tangible assets can be learned, but effectively leading, managing, and enhancing a business's intangible assets can be more challenging. Veterans with a successful track record of leadership in the military often have an advantage in this regard, as they have experience in handling intangible aspects of a military unit that they've had experience leading.
For sellers looking to retire or otherwise exit their small business, it's essential to recognize that our tendency is to favor a buyer that possesses excellent business skills, can analyze financial statements and is technically proficient in the business's products. However, their ability to lead people and maintain crucial relationships, especially with customers, plays a significant role in the overall long-term success of the business. Neglecting these intangible assets can lead to a significant decline in the business's value and reputation.
This issue is a common reason for the failure of many large-scale mergers and acquisitions. Private equity firms, for example, often focus heavily on tangible assets when acquiring companies, frequently replacing management, cutting costs to service the debt they used to buy the business or pump-up earnings on a quest to flip the business. Unfortunately, they often don't pay enough attention to the intangible assets, resulting in a decline in business performance. I could give plenty of examples, but I like to focus on positives and I'm not into hate mail!
If you've held a position as an NCO or officer in the military, you know what it's like to be given the unparalleled serious responsibility of leadership, where you're tasked with improving your team and its equipment. In these contexts, the emphasis is heavily on the intangible aspects like esprit de corps, morale, motivation, and team building.
This military experience becomes a valuable asset when buying a small business. For sellers, this is good to know. It's essential to have faith that the legacy you've built will be well-preserved when you retire or move on, knowing that those who understand the importance of intangible assets will continue to nurture your business's success. Selling to a well-qualified and proven veteran helps.
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