The #1 Business Owner Wealth Advantage– and How Not to Squander It!
Do you know what the biggest advantage of owning your own business is?
Do you know why it’s such a power financial advantage that you’ve got as a business owner? If not, then chances are you are not getting the most from it.
And that’s a shame because you don’t need to do more or work harder or spend more time than you already are on your business to use this benefit.
In fact, the more you work on spending less time needing to work on your business, the bigger the benefit generally gets.
Keep reading to understand what this is all about and how to make sure you’re making the most of it.
The steps are easy and like I said not any harder than what you’re doing. It’s the realizing it that makes the difference then acting accordingly!
The Steps…
When you think about the pros and cons of being a business owner compared to being an employee there might be some things that come immediately to mind: controlling your own time, setting your own goals, not having to deal with the boss and being in charge of your own financial future.
But in my experience one of the things that most people who become business owners don’t think about is actually the single biggest advantage that you have in owning your own business.
The key difference between having your own business and working for someone else is that when you own your own business your time is much more valuable because you are building value in parallel.
What does that mean?
I mean on the one hand that you get to decide how much to pay yourself or can you expand your earning potential beyond what an employer might be willing to pay you. But in parallel the business itself is also building in value in addition to the amount that you’re getting paid for your time in the moment.
In other words, as an employee (or solo freelancer or contractor) the minute you stop working you stop getting paid and the only time you are getting paid is the time you directly spend working.
When you own your own business however not only are you getting paid for the time you spend working but at some point, if you decide to stop doing this business you have the potential to sell the business itself for an additional gain and that gain can sometimes be the biggest part of the value from the business that you’ll get.
In some cases, this may be the only value that you end up getting. For some of our e-commerce clients virtually every single dollar the business makes is reinvested buying additional inventory and funding the growth of the business and it’s not until they actually sell that they realize any financial gain from all their hard work.
For other businesses the owners may run them for 20 or 30 years and do very well each year in terms of income but then they’re also still able to sell the business for an additional gain worth several more years of ownership but collected as a lump sum payment when they sell.
To give you a concrete personal example, when I bought my catering business (buying a business is also a great way to shortcut yourself into business ownership) I ended up spending just $18K of my own money to acquire it.
During the 4 1/3 years I owned it, I took about $690K out of the business between salary and distributions. Then when I sold it, after paying off the balance of the 10 year SBA loan I used to buy it, I realized another nearly $400K for my equity.
Put differently, I made almost another 60% on my investment just by owning the business, taking care of it and being able to sell it on top of what I took out of it during the time I ran it (really, my manager ran it 90% of the time). That’s the owner advantage I’m talking about!
The amount your business is worth when you sell it and how much you gain from owning the asset versus the cash flow you collect while you operate it depends a lot on what business you’re in and how large the business grows to be.
But it also requires some forethought on your part so that you don’t squander this value and end up not being able to take advantage of this extra value built into being an entrepreneur.
Here the main ways people screw up in this regard and don’t get to realize the maximum benefit from their business:
- Not keeping good detailed financial books and records. A buyer will not pay full price never mind premium if they can’t be shown to their own satisfaction that the business in fact performs well and provides a good living for the current owner.
Simply by failing to document your financial success you are in fact robbing yourself of additional value from the business because you won’t be able to sell for anywhere near what you should be able to sell if you can even sell at all.
The good news is this is a fixable problem and while you should have been doing this all along if you haven’t it’s not too late to get it taken care of before you plan to sell the business. (If this is your particular challenge, then we can specifically help with this!)
- Making the business transferable to a new owner. If you’ve done business in a way that requires your direct personal interaction at all times it’s going to make it much harder to sell. This means things like having direct personal relationships with your customers and being the one to service all of their needs.
If you are the business you’re going to have a tough time selling it because at that point it basically is just a job and as we mentioned previously it’s pretty hard to sell a job. In order to avoid this problem you want to start putting systems in place and delegating tasks so that while you may still be an integral part of the business there isn’t anything you are doing that couldn’t be taken over by someone else or even better you’re not any longer an integral part of the business and someone else could easily step in and take over.
The Holy Grail of this evolution is to develop yourself into an absentee runnable business which still doesn’t mean that you’re not there even on a daily basis but it does mean that you could be gone for extended periods of time and that would not cause the business to slow down or change in any significant way.
Buyers will pay a significant premium for a business that can be run absentee and so your goal as a business owner should be to get as close to an absentee run business as you can; not just to harvest the maximum value when you sell but also because there are so many other benefits that come from being an absentee owner type business. (This plan- to build your business into one that can run without your day to day input will be the focus of many of my future articles and education)
- Not letting the business go downhill before you decide it’s time to sell. As you can imagine if you put yourself in a buyer’s shoes the attractiveness of a business in decline is fairly low and the price somebody would be willing to pay to take it over is also fairly low. You never really want to be in a position where your business is in decline but it’s even more critical to not be in that position when you are planning to exit.
If you are planning to sell then do so when the business is healthy and growing and is maximizing its profitability and that will make sure that you get the best price and have the most buyers interested making a sale as easy as possible.
The bottom line here is to remember that as a business owner you are not only getting paid for your time today but you were building value that you can sell in the future.
In fact, if you are particularly good at the growing and building part you may actually find that your shortest path to the greatest financial gain is starting growing and then selling businesses and repeating that process rather than continuing to simply grow one business over the long term.
For example if in three year’s time you can go from 0 to $1,000,000 revenue business and then exit that business $1 million and then repeat the process several times you may very well end up with a significantly greater overall gain than if you simply started the first business and ran it for 10 years before selling.
Or maybe you’re someone who would do better buying, growing and then flipping? Either way, the ownership advantage is there for you as long as you don’t let it slip away.
Of course, this all depends on a lot of variables but if you find your skill set lay is more in the starting and growing than in the long term operating you can still do very well. Really, the only way not to do well is to fall into one or more of the three problem points listed above where you waste the natural advantage you otherwise would have as a business owner and that would be a real shame and it’s so easy to avoid.
