Vol 10 Issue 5

It Is About the Money

Executive Summary It is a commonly held belief that if business owners follow their passions and beliefs and do great work that the ‘money' will follow. Having worked with hundreds of business owners with their business exits, we find this to be a false assumption. It is important to understand what one needs to achieve to ensure a post-ownership lifestyle and be realistic about the time one has to achieve it. Some simple tools can be used to make these calculations. With this information, an owner can create a balanced plan that will take into account both the passion goals and the legitimate personal financial goals.

Not long ago one of my associates passed on to me a flattering testimonial on my book, Shortcut to Security, from a second-generation business owner. While this testimonial was overwhelmingly positive, the writer did have one bone to pick. The writer felt that the book focused too much on money. To paraphrase the comment:

"Our father always taught us that we should be passionate about our business; that if we were passionate and did really good work, then the money would follow."

I thought about this a lot.

Hate to Disabuse the Myth But...
I thought about the many hundreds of business owners that I have worked with over the decades. I thought about all the deals that I've worked on...all the hundreds of thousands and millions of dollars I've seen pass hands when owners decide to get out of their businesses. I thought about how the overwhelming number of them was dissatisfied when it was all over - dissatisfied when they found out that their years and years of hard work ended up netting them far less than they imagined it would.
A lot of these people were very passionate about their businesses. They loved doing their work. But for most the money didn't follow. And they weren't very happy about it. So while I don't like to burst people's bubbles, I have to say...

...It Is About the Money
Here's the cold hard truth. There will come a time for the vast majority of business owners when they are not going to want to or be able to run a business. If they haven't built enough capital over the period they've worked to cover their future lifestyle requirements and desires, no one else is going to bail them out. The primary thing that will give the business owner options for their future, flexibility, independence, and protection is money. So yes it is about money.

Be Balanced
When I state that, "yes, it is about the money", I am not saying hold money above everything else. Far from it. Money doesn't buy happiness. But lack of money can buy frustration and unhappiness - especially after a lifetime investing into one's personal business dream. The answer is to have balance by including money goals into your business calculations.

What Is Your Return on Investment Goals?
I ask this of my clients regularly when I start working with them. Usually I get blank stares. It's not part of their equation. They work hard, pay themselves as much as they can - hopefully a nice amount, and they sell their businesses. Everything turns out fine. Wrong.
If you want it to turn out fine, you have to establish some parameters and build them into your overall business model. I have written about this numerous times (See my White Paper, "Succession Planning: Getting Started" and my book "Shortcut to Security" ) but here is a simple process for establishing a personal financial return on investment component for your business planning.

Estimate when you think you would want to not have to depend on working to provide for your lifestyle

1. Quantify what it costs annually to support that lifestyle (a simple budgeting process)
2. Subtract from that amount any contributions you might get from third party sources (such as social security, pensions that might be payable to a spouse, etc.)
3. The balance is the amount you will need to fund to maintain your lifestyle.
4. Estimate how much capital you need to accumulate to support this lifestyle (I strongly recommend getting professional personal financial planning). For a start divide your lifestyle budget by 5% and you'll get a beginning rule of thumb estimate
5. Subtract other financial assets you own (retirement accounts, income earning real estate, marketable securities) from the amount calculated in 4.
6. The balance remaining is your "return on investment" target.

Focusing on the ROI Target Changes the Plan
We were working with a client who provided technical services to the agriculture industry. The owners of this company were passionate about the proprietary services they had developed and the ability of those services to aid family farms. For the 12 years prior to meeting us the three owners had been focusing on proselytizing their new services - gaining an ever-expanding circle of clients and service providers to usr their services. Their business was growing, their prospects were good, and the clients were very confident they were doing the ‘right thing'.

We were brought in because the owners were concerned about how they were going to control the business as it was expanding beyond their ability to do work personally. During the course of our analysis a number of facts came to the fore. Two of the owners were in their 60's and felt their time frame to be relatively short and their energy levels to be decreasing. In addition, when we calculated what they needed to achieve financial independence, we found a serious shortfall - even when accounting for their projected growth.
We entered into some difficult discussions with the owners. They could not simultaneously fund their aggressive growth plan, increase the cash flow necessary to fund disbursements for a beefed up retirement plan, and increase the value of the business. Ultimately, we decided upon a compromise where they did not eschew growth but ramped it back substantially while committing to a definitive program of managing for surplus cash flow each year in order to fund a top heavy retirement plan.

Don't Leave The Tangible Rewards of Business Ownership to Chance
Don't reject your passions. But don't leave your financial future to chance either. Using the quantifying tools we've described can give you a realistic picture and assist you in making decisions that will ensure your achievement of the quality of post-ownership lifestyle that you deserve.

The Podolny Group has helped hundreds of owners work through these issues and implement actions leading to peace of mind, self-satisfaction, and personal wealth. Call us and tell us about your situation.

Don’t Hesitate – Act
The Podolny Group provides business owners with rapid diagnostics that can identify your low hanging fruit and the actions you need to take advantage of it. Lower profits and lower wealth accumulation are not predestined in this new economic order if you are willing to act.