Growth Does Not Equal Wealth

Creating wealth is not the be all and end all of privately owned businesses. But virtually every business owner expects to create sufficient wealth from their business to be able to retire and maintain a certain standard of living.Similarly business growth is another driving force for owners. In many cases it is a dominating force. I have found scores of owners for whom business growth is a mantra…If one is in business, one should pursue aggressive growth. Connected to this is an underlying assumption that business growth automatically leads to business value growth which automatically leads to increased wealth for the owner.

Unfortunately for many reasons this is not a valid assumption, especially for smaller businesses (those with annual sales under $10 million). Growth uses capital. If that capital is used to fund growth and does not lead to significantly higher valuations of a business, the total return to an owner may be less than if the owner restricted the growth, took the capital out of the business and invested it.

Next week, I’ll share a case study that illustrates my point.

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