In a previous post, I challenged the assumption that business growth always results in the growth of personal wealth. Today I’d like to share a practical example from my personal experience.
I had a client who was in the financial services business. He had started his business later in life after working for a number of major firms. He was highly motivated to show success as measured by the growth of his business, not an uncommon entrepreneurial motivation. When I met him he had been growing a steady 20% a year for the last five years. He was adding staff rapidly, dealing with issues such as training, maintaining quality and funding his growth. In our sessions, the owner identified many frustrations related to dealing with his people and his lack of time for himself outside of his work. However, he was content to a certain degree because he believed that his growth would lead to a big payday.
As part of my standard analysis, I include a simple business valuation. I projected out a net value based on his maintaining a 20% growth rate and including an accounting of the capital required to fund that growth rate. The number was far less than the owner had in his own mind as the future value of the business and less than required to fund his standard of living requirements. I also ran a projection with an assumption cutting revenue by 20% of its current rate. As much of his adding to staff and overhead related to handling future growth, cutting volume by 20% created the opportunity to reduce staff and overhead by 40%! This in turn created free cash flow available for distribution to the owner of 25% of revenue. The ultimate return to the owner (accounting for the reduction in sales price in year five) was 50% higher than under the 20% growth assumption.
When I showed my client these numbers, he was amazed. “You mean I can make life simpler for me and make more money ultimately if I stop growing?” It took a while for the client to shake the growth habit. As he went on he found he was making life easier for himself and more of his work was ending up in his pocket rather than in the pockets of others.
There are many strong, valid reasons for business growth. In a competitive market, a certain amount of growth is mandatory to survive over the long-term. Growth serves intrinsic goals related to serving markets and qualitative ‘being the best’ goals. But when owners begin to plan for their exit, a cold hard look at the shareholder value that can be attained via growth compared to limiting growth should be made.
Does this story sound familiar to you? As always, I like to hear your thoughts and stories in the comments.