Having your financial cake – and eating it too17th August 2017
I know a business which lost 60% of its turnover in a year. It sounds calamitous, but it’d been running very profitably for 15 years, and most of the value it had built up was still there as cash.
The owner had never had to make any big investments in his personal life, so he just paid himself a salary – a perfectly decent one, but not large. All the ‘super-profits’ which his business was making over all those years were just left sitting in the company.
If and when he comes to sell it, its value will be significant – despite the recent downturn in the business’s fortunes.
Keeping that much money in your business isn’t a route I’d recommend to everyone. But it does illustrate the choice you have, if you are intending to exit your business one day.
You can have the cash now, as you’re building the business; or you can have the cash later, when you sell it. You can’t have both.
It’s perfectly reasonable to want the cash now, and pay yourself a massive salary or dividends each year. It won’t necessarily kill your business: A successful company will keep on creating value.
But you have to remember that any cash you take out now won’t be there when you come to sell it, so the business will be worth less at that stage. The value that the business has created over the full term will be more or less the same, it’s just that you’ll have taken some of that value out early.
If you were relying on a humungous payday when you sell your company to fund your retirement, that won’t happen.
If, on the other hand, you want that final sale to be as large as possible, it’s better to take a smaller salary as you’re growing the business. Many people take very modest salaries when they’re starting up, while later their pay may be more in line with what they’d expect as an employee. (Perhaps a well-paid employee…)
Anything above that might be called super-earnings.
When I have conversations with clients thinking about taking super-earnings, I try and make sure they have solid reasons. What are they planning to do with the extra money?
There’s nothing wrong with deciding to benefit from your business’s extra cash as you go along. But you have to remember: there will be consequences when you to come to sell.
It all depends on your long-term priorities and strategy (and of course if you have several owners all with different strategies, it will be an extremely complex decision!).
The million-dollar questions are:
What’s your big plan?
What do you really want out of your business, now and in the future?
How much value do you need in your business, when you sell it?
Just remember, you can’t have your cake and eat it too.
If you would like help figuring out the long-term plan for your business, and ensuring that it fits your financial needs, hit ‘reply’ and let’s talk.