Do You Have What It Takes to Own a Successful Small Business?

April 16, 2024 Eric Hinkle

"If you don't know where you are going, any road will get you there."
— Lewis Carroll

There’s a Chinese proverb that essentially says the first generation works hard to build wealth; the second generation loses the wealth; the third generation has no wealth and has to start the cycle over again. Whether you plan to hand your business down to your kids or sell it to the highest bidder, you can help your company survive and thrive well into the future if you have a clear vision of what you're trying to achieve, an effective strategy to get you there, and the right people on board who can execute that strategy.

The Entrepreneurial Myth

In E-Myth Revisited, Michael Gerber says most startups are founded by technicians who had an “entrepreneurial seizure.” A moment when they decided to quit their job and be their own boss. The fatal assumption many of them make is that if they understand the technical work of a business, they also understand how to run a business that does that technical work. Knowing your “craft” and knowing how to run a business are two very different things.

At any given moment, you’re either working IN your business or ON it. If you’re too busy to take a vacation or work ON your business, then you’re IN too deep. You own your job. The business owns you. If you're good at your craft, you might earn more money and enjoy a better work life as an employee with a larger firm.

Return On Investment (ROI)

Consider paying yourself a fair market wage as a W2 employee for every hour you work IN your business. This will give you a more accurate picture of your company's true ROI, net cash flow after paying yourself.  And then ask... How much could you have earned in the stock market with the capital you have tied up in your business? How much could you have earned as an employee somewhere else? Those 2 numbers combined are your opportunity cost.

Most people have investments AND a job. You do too. Your business is an investment. What you do IN that business is your job. It's okay to expect a fair return on both. In fact, 20% of small businesses don't survive the first year and 50% don't make it 5 years. And the #1 reason is that they run out of money. Don't sell yourself short. There are many non-financial reasons for owning a business, but the ROI on your investment should be more than you could earn in the stock market.

Systems and Processes

Don’t do anything IN your business that someone else could do for you. Standardized systems and processes (ie, your business operating system (BOS) will make it easier for your employees to do the work without you. And make your business more valuable.

Every business needs a visionary leader; operations manager(s) who know how to execute the leader’s vision; and people (technicians) to do the work. If you own one of the 27 million businesses with no employees, you get to fill all 3 seats. No judgment. Solopreneurs can make a lot of money. However, in Built to Sell, John Warrillow shares 17 tips on how to maximize the value of your company. One of them is, "Don’t become synonymous with your company.” Before I bought the company that became Workwise Inc. (Scaling Up Guide is a DBA of Workwise), I looked at 2 other companies. They were attractive on the surface, but the owner was the #1 salesperson in both cases. End of conversation.

Seller’s Discretionary Earnings (SDE)

SDE is the total financial benefit you receive as the business owner, including your W2 income. My second startup was a learning opportunity. (AKA, I lost money) 😢 I bought into a terrible franchise. I was too cocky from my success with my first startup. One year in, I wanted to sell the company, but I was losing money. No one cared about the 6 figures I invested into brand-new equipment etc. My company was worthless without positive cashflow. Challenge accepted!

I  exited the franchise system, rebranded, retooled, and created my own new systems and processes. I also went to work with a larger company to earn a W2 income after I got everything in place, including a reliable manager who I could trust. After 3 more years, my SDE was finally large enough, for long enough, to sell the company. 

If your "end in mind" includes selling your company, SDE is the first thing your potential buyers will care about. They'll want to see at least 2 years of financial statements reflecting your then-current products and business operating system (BOS). So, you'll need those 2 years, plus however long it takes you to get your new BOS in place.

If your SDE isn't more than your opportunity cost, it might be time to ask for some help. Schedule a time for us to talk.




By the way, the graphic above was created by artificial intelligence (AI) based on what I wrote in this article. It's not perfect, but I'm still amazed by the technology. AI is just another productivity tool, like computers and the Internet. I don't believe it will ever "replace" us.

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