Vol 8, Issue 6
Is Your Ego Impoverishing You?
Taking Into Account Capital Requirements
So if a strong ego is practically a mandatory characteristic for being a business owner, what’s the problem? The problem can occur when an owner’s ego-driven visions for accomplishment start conflicting with the reality of age and energy limitations. This issue becomes particularly acute as owners start reaching a time in life when they are contemplating doing things with their time other than running their business. For the owner to make such a transition to other activities, they need to have a source of continuing income -- an accumulation of capital that will produce that necessary income.
It’s normal for an ambitious owner with a healthy ego to be pursuing new opportunities for their business and to be making big plans for what the business can achieve in the future. To make all of these big plans happen, the owner will make expenditures and investments. The conflict occurs when the owner fails to take into account the capital requirements of his life beyond business ownership as he is planning and making capital outlays to finance his ego vision for the business.
Some Realities of Business Investment and Return on Investment
Most business owners do not realize that many of the things they spend money on or invest in to pursue their business vision have long payback periods – the benefit from their expenditures is often farther in the future than they realize. When the payback period on the expenditure stretches beyond the timeframe the owner has set for leaving the business, those expended funds will not be recaptured. This is extremely important.
Many an owner learns about payback periods the hard way. They find themselves wanting to sell their business and telling the prospective buyer about all the expenditures they have made to gain new opportunities; opportunities yet to be realized in the form of tangible profits – no payback yet. The buyer will tell them how great it is that the seller has been making these investments in new opportunities but they will pay only for earnings that have actually been demonstrated. Bad news for the owner – his investments in new opportunities didn’t translate to increased capital to him because the payback period was longer than his personal time horizon in the business.
Fortunately, there is no need for this situation to occur. A simple quantification of alternatives will show an owner the effects of one path versus the other. For each new opportunity, the owner should determine the payback period and potential profit for the expenditure being contemplated. Then compare that scenario to just taking those same dollars out of the business and accumulating them in the owner’s personal investment accounts. Often when an owner’s time horizon to exit the business is short, this analysis will reveal that the financial benefit to the owner is better by choosing the path of not growing the business.
Is the Dream Worth the Cost?
One of our clients was a computer services provider. His business had developed some proprietary methodologies and as a result had attracted attention from a variety of outsiders who were interested in developing similar business models in other parts of the country. The owner was particularly excited about the prospect of this growth. He had previously thought of himself as a relatively local business and now there were opportunities of a much wider vision on even a national scope.
One of the restricting factors for the owner, however, was his age as he was in his 60’s. During our Podolny Method analysis, he had clearly indicated that slowing down and pursuing non-business goals was extremely important to him. Our personal financial evaluation identified that he needed to be accumulating substantial personal capital over a short period of time to achieve his goal of slowing down.
Quantifying Alternatives Leads to a Compromise
We ran a projection for the owner showing how much he would spend to build his national network and also estimating the projected value of his business based upon that strategy at the end of his short time horizon. Since his business growth plan would take many years to achieve fruition while consuming capital, most of the money he was spending would not increase his net realized return from the business.
Running a simulation which assumed that he remained a local operation actually showed a much better return since the dollars he would have been spending on growth, could now be taken out of the business and added to his personal investment accounts.
Even with this tangible demonstration of the personal financial benefits, the owner had a difficult time making a decision, as the drive to achieve and push forward was strong. Ultimately The Podolny Group was able to help the owner develop a lower cost model for his expansion that allowed the owner to have the best of both worlds; continuing his growth plan but still being able to create free cash flow to take out of his business for retirement funding purposes.
Owners should not deny their egos. But they should understand and acknowledge their ultimate non-business goals and use quantified analytical tools to make sure that they are building the wealth they need to achieve their non-business goals.
Owners are advised to consistently compare their business goal requirements against their personal goal time frames. Downloading our free book, Make Your Business Serve You©, provides a methodology for conducting such a review.