Work on your business, not just in it
Several years ago, a friend and an owner of a professional practice asked me to help him run his firm like a "real business." As it turned out (and much to my surprise), I had the temperament and skills to think strategically, lead a team with fortitude, and relentlessly execute a plan with laser focus. I was a natural executive.
My success in that role led me to a project with another firm, and then another, and so on. Thus began my life as an accidental executive and business consultant.
WHAT BUYERS WANT
At first, with no prior experience running a business and no one guiding me, I had to think hard about how I can maximize my effectiveness in the shortest amount of time possible to help my friend-turned-client.
To this end, I decided to approach the project from the perspective of an imaginary buyer. I asked myself, "If I were a potential buyer of this business, what would make it so attractive and hard to pass up that I would willingly risk my hard-earned money and even take out a humongous loan to buy it?"
I concluded that, as a buyer, I'd look for a turn-key business that's set up to generate a healthy cash flow – sustainable, predictable, and transferable – year in and year out long after its owner has moved on. (I would learn later that this is called "transferable value." i.e. what a business is worth to others without the owner.)
In my mind, a saleable business was a healthy business, and vice versa.
REALITY SETS IN
With that in mind, I rolled up my sleeves and got to work.
Soon, a worrying pattern began to emerge. While each firm I worked with was unique, profitable, and successful, every single one was far too dependent on its owner (also the founder) who acted as its CEO, CFO, COO, relationship manager, rainmaker, HR manager, marketing director, client event coordinator, bookkeeper, and the person who took out the trash.
If the owner were to suddenly disappear – voluntarily or involuntarily – the firm would decline rapidly and may even collapse in time because no one was trained or equipped to step up and into the owner's shoes and keep it afloat, much less grow it.
In short, while these firms were profitable and had the appearance of success, there was no transferable value to speak of because they were too dependent on their owners.
Let that sink in for a moment. They all owned fabulously successful and profitable – but worthless! – businesses.
GETTING MORE FOR YOUR BUSINESS
This observation led me to develop and implement a system that would give them the best chance to generate healthy cash flow – sustainable, predictable, and transferable – designed to minimizes dependence on the owner.
Of course, it was easier said than done.
It entailed implementing a strategic plan with discipline instead of operating at the whim of the owner, developing a firm-wide growth strategy rather than depending on the owner’s rainmaking skills, documenting business and operational processes and having everyone (including the owner) follow them, managing business risks, tightening up legal documents, formalizing financial controls, and so on.
Sounds simple enough, right? But it was hard work. Really hard and really time-consuming.
I remember a particularly challenging and time-sensitive project where the owner of the firm was facing health issues. With revenue rapidly dropping and clients leaving by the week – not to mention declining employee morale – we had to act fast and reverse course. When the dust finally settled, I somehow managed to help increase the value of the firm four-fold (400%) and sell it at a price that would have seemed outrageously optimistic and unrealistic when I started the project just one year prior. The most memorable compliment I received from the owner was, “Where were you five years ago?”
I'm now back to being a financial advisor full time, but I still think about the many things I learned from working with these business owners. Of everything I learned, two things in particular stick out to me:
First, if you own a business or a professional practice, growing and protecting the value of your business, and eventually monetizing such value, is enormously consequential to achieving financial freedom.
Said differently, the net amount that ends up in your pocket after selling your business – after taxes, after fees and commissions, after paying off outstanding loans and bills, after everything – can directly, and quite literally, impact what you can and can't afford in retirement and how much you can and can't leave to your heirs and/or charities.
Second, don't underestimate the time and effort it takes to get your business ready to sell for maximum price. It requires a radical change on your part because buyers want a turn-key business – a company that can function and grow without you. So, to get your business ready for sale, think 5 years of grind and a radical shift from business as usual.
Clearly, it's worth your time and energy to transition out of your business by design rather than by default. It's worth every bit of your effort to work on your business, not just in it. You can't afford to leave it to chance.
We do not provide legal or tax advice. Readers should consult their own legal or tax advisor. There is no guarantee investment strategies will be successful. Investing involves risks, including possible loss of principal. There is always the risk that an investor may lose money. A long-term investment approach cannot guarantee a profit. Investors should talk to their financial advisor prior to making any investment decision. This information is intended for educational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services.
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