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BY JULIE GARELLA
I don’t think I’ve ever met an entrepreneur who didn’t have a long-term goal of wealth creation. But, I’ve met plenty of women business owners who are unlikely to get there, despite years of diligent work and steady profits. That’s because they’ve built their businesses unselfishly, without a clear vision of their own personal bottom line. When it’s time to exit, they often discover their build-it-and-it-will-come philosophy wasn’t enough to ensure their financial future.
How do you make sure your business is creating personal wealth? I can’t emphasize this enough: From the get-go, you need to keep a keen eye on growing your largest asset — your company. And you need to start with a specific pay-off number in mind — a figure large enough so that when you sell, you’re not taking a personal step back.
Living Large — or Not
Don’t let dreams of a larger-than-life number lull you into a false sense of security. That’s what happened to Cheryl, a 55-year-old business owner in Phoenix . She came to me ready to reap her rewards, confident that she would spin off a more-than-comfortable investment income from the sale of the packaging company she spent 15 years building with her brother.
I hated to be the one to tell her. But, here’s the math: Her $20 million business was earning about $2 million of EBITDA (earnings before interest, taxes, depreciation, and amortization) per year, making it worth roughly $10 million. Splitting proceeds with her brother would reduce her share to $5 million. Paying the IRS and other assorted costs could leave Cheryl with as little as $3.5 million.
Even if clever investing yielded a “pie-in-the-sky” 10 percent at best, Cheryl would receive an annual income of $350,000. When you consider the company car, pension and stock options, health benefits, and other perks she enjoyed with business ownership, Cheryl’s yearly “take” reduced even further. Could Cheryl leave her business and still live the way she had planned? To her dismay, the answer was “no.”
What Cheryl has is what I describe as a “lifestyle” business — one in which you need to keep working in order to maintain your lifestyle. She isn’t going to have a chunk of money to invest or the sustainable income she anticipated. Unfortunately, she’s not alone. She is one of the many smart, responsible women who weren’t aware that they had built a big, beautiful lifestyle business — instead of a strategic, saleable growth company.
Gotta Get a Number
For Cheryl to wind up with the assets to live in the style to which she had become accustomed, she would have needed a personal profit of $10 million. That means she would have had to sell her company for between $30 million and $40 million, with an EBITDA between $6 million and $8 million per year. It’s fair to say that she might have made very different business decisions had she had that number in mind.
So, knowing your number up front — and strategically growing your company to get to that figure — can be the difference between a limited future or a lifetime of wealth.
No one is saying it’s easy to get that kind of aggressive growth organically. Most entrepreneurs exiting with a substantial, reliable income acquired capital investment to take their enterprises to the next level long before the pen was poised to sign the selling agreement.
Don’t panic if you feel that this type of long-range planning or accelerated business building isn’t your forté — this is where investment banking firms can play a critical role. They can crunch the numbers, clarify objectives, and develop the financing to propel the company forward. A capable consulting group will make sure that the bottom line remains top-of-mind so that when it comes time to sell, you’re in the best possible position to live the life you worked so hard for all those years.
Julie Garella is co-founder of McColl Garella LLC (www.mccollgarella.com) in Charlotte , NC , an investment banking firm specializing in women-owned businesses and serving clients nationwide. She can be reached at jgarella@mccollgarella.com.
(This article is reprinted from the Spring 2004 edition of Enterprising Women magazine. Copyright 2004 Enterprising Women Inc. Reproduction in whole or part is prohibited, except by express permission of the publisher.)
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