Lifestyle or Wealth Creation? - Financially Speaking
In the last article, we discussed how important it is to make you, the owner, dispensable if you have any ambitions to create personal wealth from the sale of your business at some point. E-commerce businesses are brilliant vehicles to grow fast because you can react quickly to market changes and take advantage of so many digital tools and services to build your empire. But an e-commerce business still has similar metrics and parameters to any other, and the basic rules of financial management are the same.
In deciding whether to head towards a lifestyle business or make your operation as valuable as possible, there are also several areas of this financial management to be aware of.
The first and most obvious is the level of investment you plough back in from any profits you make. If you have a five-year plan to grow and get out, then it may be that every cent you make needs to be re-invested in the pursuit of growth, and this might mean you are forgoing that new car or a nice vacation for a while. When companies are sold they will often be valued at a multiple of the sustainable annual profit -so if improving that profitability trend for say three years increases the eventual valuation by a buyer by say, seven times that profit, you may consider missing out on a few luxuries as a fair sacrifice to have made.
Running a lifestyle business often means that owners can blur the lines between their business and themselves when it comes to spending money. Even if it bends the rules slightly, who cares if you use the company credit card for a few family meals or even have one of your employees paint your house on the company’s dime? You’ve earned it and the tax man isn’t going to find out is he? Well maybe he won’t, but any excessive ‘blurring’ may come back to bite you at some point, and if you want to move towards an exit, then it would be good practice to taper these activities and run a clean ship. Not only will doing so improve the profitability of the business and thus make that multiple work harder for you, but it will also leave you less exposed. The process of selling business usually means the buyer will crawl over your books with a fine tooth comb, and if they unearth dubious financial practices, they may not wish to inherit the potential liabilities that could be created with the authorities in the future.
Now all this may sound a bit negative and anti-lifestyle – but it really isn’t. You just need to be clear on your objectives. If you intend to run a lifestyle business ‘forever ‘, then you can make your own rules. You can even run it that way for a few years and then exit - just make sure that you leave enough time to adjust your operation in the two or three years before you intend to go. Ideally, to create maximum wealth from that exit, your business needs to be clean and accelerating. So here are a few tips for when you do:
- Keep the profitability trend line increasing in the years immediately before you intend to exit
- Separate personal and company transactions to make them as ‘arms length’ as possible
- Keep a careful record of any personal expenditure made by the company on your behalf. This will enable you to demonstrate to a potential buyer how such costs will disappear (and thus increase profitability) when you are no longer the owner.
- Keep investing in the Company’s future even if you intend to exit. Savvy buyers will reduce valuations if they believe that they will need to plug immediately any financial gaps that you have left.
- Check the tax rules in your country or state. In some places, it pays hugely to leave cash in a business and extract it as part of the sale proceeds rather than pay yourself as you go along.
But if you are going to run your business in’ lifestyle fashion - then make sure you enjoy it!