Very few creatives launch their practices planning to cash out with a big exit down the road. This is one significant difference between creative entrepreneurs and other startup founders. We get into our trade out of love for our craft, not so much for the financial rewards. But the very fact that we start our businesses with little to no thought of selling, can become a major contributor to systemically low profits. If you were planning to sell, like a typical entrepreneur, you would pay much more attention to your bottom line. And so managing your practice, as if you were going to sell it, could help you improve your profits, and would lead to other positive outcomes.
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Creative entrepreneurs don’t dream of taking their companies public, or getting acquired for millions. We want to get paid well for our work, but a massive pay day is not why we practice our craft. And so we go about our businesses doing the best we can to manage the ups and downs to our cash flow, as we try to make ends meet. Occasionally though, usually as a creative starts to see retirement on the horizon, we start giving some thought to a possible ownership transition. It can come as quite a shock for someone who has invested so much of their heart and soul into their creative business for decades, to find out that on paper, their business is hardly worth anything to prospective buyers.
This, sadly, is often the case, because many creatives unknowingly run their practices at a close to break even basis for years at a time. Breakeven businesses never build up equity, and when it comes to the concrete value of a company, it’s your equity that matters most. How much better would it be for creatives if we gave attention to our profitability and our equity from day one!
And so running your creative practice, as if you were going to sell it, is a healthy way to ensure that you’re operating profitability. If you were going to sell you would regularly be evaluating your company’s balance sheet. You would be making sure that the “total equity” line item in that report is steadily increasing. And if it wasn’t you would investigate why. Which would lead you to giving attention to your Profit and Loss reports, which help to identify where your expenses may be too high, or your revenue and pricing too low.
Rarely do creatives give attention to these fundamental financial reports, because building equity is not as important to us as simply meeting our monthly expenses. But if you were going to sell, meeting expenses is not enough to build serious value.
But even if you have no intention of selling, operating as if you were would have another benefit—it would incentivise you to pay yourself a premium salary as an owner. You see, if you were to do a valuation of your company for a sale, one important evaluation is what you as the owner/operator have been paid. If someone bought your company they would either enter your role themselves or they’d have to hire someone else to fill it. If what your company has budgeted for your role is under the market’s compensation level, that would be considered a liability, and you would need to discount your sale price accordingly. On the other hand if you were paying yourself well above market, that would open up revenue, after a sale, which would therefore increase your sale price.
Another benefit of running your practice like you were going to sell is in how you would need to structure your role. To the extent that you are absolutely central, and critical to daily operations, any sale of your company would need to include a significant transition time table, which has real hard costs associated—and would therefore decrease your sale price. But if you manage your firm so that projects can be completed, and most daily operations can run without your involvement, then transition costs would be low. And if that’s the case, even if you never sell, such flexibility would offer you lots of freedom as a business owner.
Most creatives never do sell their practices, maybe because they end up realising that it’s not worth it. But if we ran our businesses as if we were going to sell someday, maybe more of us would, or at least we would enjoy greater benefits from owning them in the first place.
Until next week: don’t let the business of creativity overwhelm your creative business.