Why you must make sure to have your cake and eat it!

Starting, building, growing, and sustaining a business is hard.

Because we have little funding in this process, we do it with a view to secure revenue as fast as possible. But this develops habits that, if we don’t change them, builds a business that generates income for us, but that can’t be sold.

94,6% of businesses started, fail to sell and close.

A life lived successfully building an income generating business, is a life lived poorly when you cannot monetise your years of risk and investment because you cannot sell your business for a capital gain.

Rather, we should have our cake (an income generating business) and eat it (a capital growth business). Both are possible and realising this too late is a costly mistake.

Listen to Pavlo Phitidis discuss how to get this right on this podcast from The Money Show

https://omny.fm/shows/small-business-focus/small-business-focus-building-a-business-that-gene

Think of it objectively:

If you have R1000 and you want to invest in the stock exchange, with a view to hold on to it for 5 years.

You can ear dividends – let’s say R200 per year. At the end of 5 years you’ve enjoyed R1 000.

In your business the income dividends come from a salary, other perks of owning the business and dividends.

In 5 years you now want to realise its capital growth

Let’s say your share is now worth R2000 – you sell it and gain R1000 on your initial investment.

You had your cake and ate it as the R1000 you made in dividends covered the R1000 invested AND you made R1000.

The third element to this is that the share has to be interesting to someone, to buy.

In our businesses, this so often doesn’t happen because the business owner is central to the continuation of the business. Without you there, there is no business.

You need to think with both an operator and investor’s hat as you run and build your business. The sooner you start thinking like this, and behaving differently, in accordance with this, the better your chance of making it into the 5.4% who can sell their business, and secure their retirement, and legacy.

job vs asset

When the business you’ve built is just a job

Don’t look where you fell, look where you slipped is a favourite African Proverb.

Listen to this podcast from The Money Show where Pavlo Phitidis unpacks why this resonates with him in regard to many business owners he works with:


It came to life after 2 consultations with 2 different business owners today.

The first business owner, in his 50’s has built a remarkable business in a commoditised market. With a $30m annual revenue, he has generated a solid income for himself and the partners. They now want to monetise their 32 years of investment and risk through a sale. This would allow them to enjoy the capital gain that would be their greatest wealth generating instance. But the market does not see their value. After a due diligence from a prospective acquiror, it was evident that the partners hold and own relationships that are responsible for 56% of annual revenue. The uncertainty that these relationships would remain in play after they sold, led to the acquiror discounting their asking price by a hefty 60%.

The second business owner in the security sector is in his late 30’s. Over the last 5 years he has built a very smart, tech-based solution for the eventing industry. Specifically, it is suited to big entertainment, sports, and political events. Recently, his business took off. But his clients, on the back of big, medium-term contracts, insist on his presence at the events, even though he needn’t be there for the service to function and perform. He wants to work with Aurik to resolve this problem. We’ve agreed to help. It’s a problem we have solved many times before. Today was the third postponement of our first session. But the news, like last time, is all good. He is overwhelmed. Having just signed on 3 new stadia and bidding with a high likelihood of success for the Olympics, he urgently has to deal with client needs. Urgent, but how important? This path will lead to the same problem faced by the first business owner – is the business an asset or is it a job?

Starting and building a business needs you at its core. It’s you that needs to learn what works and what doesn’t and through that, find a path to establishment and growth. Transiting from your daily direct leadership to a team then becomes essential. This is where many fail and 5,10,20 years on, still remain front and centre of the businesses sustainability or growth. So how do you get it right? And when should you act to get it right?

How do you get it done?

  1. Simplify – narrow the scope of your business both in terms of who your customers and clients are as well as the extent of the services you provide to solve their problems. A simple business is scalable and a scalable business is a growth business.
  2. Systematise – translating and articulating the activities you perform in how you market, sell and service your clients into teachable activities, organised into a sequence with measured outcomes is next. Once done, linking and stitching them into a single system or experience from the view of your customer is vital.
  3. Delegate – with your business organised into a single system, made up of the many activities, you can now empower your team to perform the activities. Remember, the activities generate the experience, not your personality. If you cannot get it done, discard that element of the experience and make do with what you can get done.
  4. Grow – with a scalable platform for growth in place, growing beyond where you currently are needs to be led by you. Setting a framework for growth that maintains the scalable service platform you have now built is essential. Failing to do so unwinds all the effort and will see you again, front and centre of the business, or put differently, the job you have built.

When should you start?

Once you have traversed the first 3-5 years of start-up, the time to transfer relationships, processes and responsibilities becomes essential. Should you opt not to or fail to do so successfully, you are building a job, not an asset. You limit the scope of your business’s potential, limit the opportunities to attract driven team members and fail your own future wealth creating instance.

Urgent and important are different. Urgent mostly means that you are being led by other people’s agendas. A client must be responded to. But you have full control over which clients you have, the promises that are made and how you build your business to operate without you. That’s the important, strategic, structural stuff of turning a job into an asset. Put differently, building a business that can be successfully sold in the future to become your greatest wealth generating instance.

What if Buffet were buying… is your business sellable?

Most business owners are so wrapped up in the many challenges of their business that when Pavlo asks them: “What lies ahead?” Their responses are very vague.

The reality is that there are only two destinations for every business: sale or closure. And globally, 94.6% of businesses started, fail to sell.

Many owners believe that because they have built a business that generates good income; that has put a roof over their heads; that creates jobs and has a productive impact in their industry, it will be sellable – this is not the case and the stats are there to prove it!

Listen to Pavlo unpack why we build unsellable businesses, and how to build with a buyer’s mindset in this podcast from The Money Show:

Pavlo’s view is that as business owners we get wrapped up in how we start our businesses – there’s generally very little capital available so all our focus is on generating cashflow to get things going and build some momentum.

In addition, there are usually demands at home that require money, and we build the business around the needs we have to service.

After years of operating like this it becomes habit, and it is very difficult to realise that you’re still doing things the way you did 5, 10 or even 20 years ago.

Businesses aren’t just sold, they need to be built to sell.

The starting point is to realise that what you need from your business, when you sell it – is not a credible valuation methodology!

Secondly, as wonderful and unique as you think your business is, there are thousands of businesses just like you.

Valuation is mathematical. The maths compares risk and return across the market. And understanding the levers that can increase or decrease the risk and return in valuation is critical.

Buyers look at our businesses differently to how we do.

Buyers have key questions in their mind when they look at a business.

The questions are designed for 2 things:

  1. To establish whether I can get a return?
  2. To evaluate how to reduce the price by picking out the flaws in the business

Understanding how the buyer thinks, today, will affect how you build the business for tomorrow.

What are the questions that buyers ask:

  1. What makes you different from the dozens or hundreds of businesses like you. If you can’t distinguish yourself, that’s a mark against you.
  2. How far into the future can this business continue. You have to be able to show growth in the past – that will continue into the future. The way to do this is to demonstrate that there are systems to continue this trajectory.
  3. Who is going to do it? In a buyer’s mind, are they buying the business to run it, in the way that you’ve run it? Will the staff stay? Will it run without you? Often, without the owners in it, there is nothing to be bought. A business has to operate without the business owner, or in effect the business owner has just built a job for themselves rather than something that has value for a buyer.
  4. How long will it take me to pay off my investment, and is there enough growth in the business to take me into profitability?

 

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