Why She Can´t Sell Her Business
Sally has a professional services business that generates a profit of $500,000 per year on sales of about $2 million, which means her profit margin of 25% is more than double the industry average in her space (10%).
She takes this profit as distribution throughout the year and spends all of it on lavish trips, expensive houses, and cars. She told me she needs the $500,000 to continue funding her lifestyle, but she’s exhausted and wants to sell.
Her company is worth about $2 million in its current state, but a buyer won’t pay that much for it upfront. Instead, they’ll offer a much lower price, and to get the rest, Sally will have to stay for a three- to five-year “earn-out.” Because she’s been doing all the sales, making all the decisions, and overseeing all the projects, the company can’t run without her.
She does have a team, but they’re dependent on her, and to minimize the risk that the business might fail without her, a buyer would require her to stay on. But there’s no way Sally will agree to work three to five years for someone else in her own company.
Even in the unlikely event that a buyer could be found who was willing to pay full price without an earn-out, there’s still a problem. Based on her current lifestyle, $2 million isn’t enough money. It’ll only cover her lifestyle for four years!
Your Business as an Asset
She doesn’t treat her business as an asset; she treats it like an ATM. It’s a lifestyle company, where she drains money out every year to pay for her lifestyle instead of reinvesting it for growth.
Here’s the worst part: Sally feels trapped by her business. She owns it, and she can change it, but it seems like it owns her most of the time. The action she takes is fueled by negative feelings like frustration.
If you’re like Sally—and I was in the beginning, too—you may also feel trapped. In moments of clarity, you think, “That’s it, I’m going to get it together and really scale this business,” and you try to use willpower and grit to change the circumstances. You hire a new manager, or go to a seminar, or buy a new software solution. You redesign your website or start a new digital marketing campaign. But you’re trying to solve the wrong problem.
The main problem isn’t your business. It’s your thoughts about it. When you don’t think of your business as an asset, aren’t focused on increasing its value, and forget to look at it as an investment, you’ll fall into the lifestyle business trap. The problem with that is you end up working for your business, and it doesn’t work for you.
To turn this around, start thinking of your company as an asset and yourself as an investor in your business. Take the time to notice and feel good about the value it creates. And then take action to manage it for growth.
When you do, you’ll start to regain the sense of freedom you had when you started.
Read my other blog: What´s Love Got To Do With…Business?