The Dilemma of a Successful Entrepreneur
Building a successful business is a grind. There are no shortcuts, and you must get up every day and face your fear of failure. The payoffs from building a company that produces sustainable cash flow are fantastic.
Here are some of the obvious payoffs:
1. You are your own boss, and you get to make the rules. If you have built a successful business, you are probably a hard boss to work for, which means you are hard on yourself too.
2. The lifestyle benefits of a business with substantial and sustainable cash flow are enjoyable. If your business is structured such that you can take time away without any negative impact on the company, then the payoffs are even better.
3. There is a significant tax advantage to paying certain expenses through the business account rather than your personal account. You need to tread this line carefully in how you can justify certain personal expenses as business expenses. Travel and accommodation are obvious expenses that can be passed on as business expenses.
4. The ultimate payoff for a successful entrepreneur is that you have developed an asset of value that can potentially be sold. Therein arises the dilemma.
Selling a business requires that you can attract a buyer who is willing to pay an agreeable price to acquire the future cash flows. The sale of a business is an exchange where the seller gets a lump sum, discounted amount of the future cash flows today. To get a higher lump sum today, you must prove to the buyer that there is more cash flow in the future or less risk.
The dilemma faced by the entrepreneur is that you can either extract the value from the business today or in the future when you sell the business, but not both.
Extracting the value today means you live high off the business by taking out excess cash to fund your lifestyle or other business ventures. This relates to point three above. It is taking advantage of the tax benefits. The problem with extracting value today is that the business’s free cash flow is lower. A due diligence process by the seller will reveal an expense base higher than necessary.
Extracting value in the future when selling the business requires discipline in the short term. That means running a tight ship. In this case, the due diligence process will reveal higher free cash flows, and therefore the sale of the business will attract a higher price.
Excess cash can be taken out of the business through dividends and/or salary. That way, a potential buyer can clearly interpret the free cash flow of the business and thus justify a price multiple based on profitability. Extracting cash from the business through ad hoc expenditure that takes advantage of tax benefits only serves to muddy the water in the event of a sale.
Justin Spencer-Young
