Most creatives get into business out of a passion for their work. Unlike creatives, I’ve never met other entrepreneurs looking to get into a new business or buy a franchise, who looked into the creative service sector and thought, “that looks like an interesting and lucrative opportunity.” Creatives end up backing into business ownership almost by accident.
Selling Never Enters the Picture
Creative entrepreneurs are quite different from typical startup founders. Other entrepreneurs launch their company having exit goals from day one. These founders understand that when they start a company they need to build value and equity so that they can be acquired and get their big pay day.
Creative entrepreneurs, on the other hand, simply love what they do, and when opportunities start to exceed capacity, they head down the hiring road and soon find themselves running a business. Selling the company was the furthest thing from their minds. At least until the realities of running a business hit them. After the fact, when they find themselves doing more administrative and business development activities than creative work, they might start looking for an exit.
Not Paying Attention to Equity Results in Not Having Any
Unfortunately, when a creative starts thinking about selling when they are under pressure, they’re likely to discover that the actual value of their business is not very great. In fact, according to their balance sheet, they might not have built any equity at all!
And so, as a general rule, for any business owner, learning how to operate your business as though you intend to sell it, will help you manage your firm better, and teach you how to build a profitable firm. Even if you never actually sell, managing as if you are has compounding benefits.
Here are three concrete ways that running your firm as if you were going to sell it will benefit you.
It Will Make You Pay Attention to Your Financials
First, it will force you to pay attention to your income statements and your balance sheet. If you were to ever sell your company, the buyer would need to see these financial reports, in order to determine a sales price. They would need to see what your revenues have been, and more importantly, your profit margins. Getting right down to the bottom line, when you look at your balance sheet and follow the “total equity” line item year over year, if that number isn’t steadily growing, a buyer will never offer you very much to acquire your business. Total equity is the bottom line, but growing that bottom line means you have to be diligent about your revenue and expenses day-by-day. And so operating as if you were going to sell means you will be evaluating your profit and loss statement in order to improve your financial performance. Simply paying attention to these reports will serve you well, whether you intend to sell or not.
You Will Pay Yourself More
Secondly, operating as if you were going to sell will significantly impact your own compensation. I’ve had to perform a few valuations for creative firms, including when I sold my first company. Part of that process is considering how the principal’s compensation level should either discount or augment the purchase price. You see, if a principle is underpaid, that equity number has been subsidized by their low salary. When you remove the principal after the sale, you will need to replace them with someone else. And if hiring someone with enough experience would cost more than the owner was paid, that’s a hit to the valuation. Of course if the owner was paid well, above the cost of replacement, that would increase the valuation since hiring someone at a lower salary would be a net gain. And so, operating as if you were going to do such a valuation should incline you to pay yourself more, and to stop subsidizing your profits through a low salary.
You Get More Freedom
Thirdly, if you were to ever sell your company, you would need to make sure that it could run without you. If you are necessary for daily operations, and have your hands in all aspects of management, then replacing you would be a huge cost to a new owner. That cost would significantly impact a sales price. On the other hand, if you have a team with clearly defined roles that can get the essential work done without you—if your personal footprint is modest—if the company is viable without you—a new owner would value it higher.
Besides, running a firm to operate without you also gives you the freedom to take a week off, or a month, or longer.
Of course if you operate as if you are going to sell, so that you end up with a high paying, flexible job, doing work you enjoy, and that allows for plenty of time off, why would you ever sell? And maybe you wouldn’t, but operating like you are can be the key to getting there.