Every company was started by a person who had an idea.

We can all agree on that. The “Why” behind that idea varies quite a bit. There is no right “why” or wrong “why,” but it is important to know where you are on the spectrum. Do you own a job, a business, or a lifestyle?

OWNING A JOB

A while back I spoke with a business owner who was looking to sell his business. At the time, he was in his early 50s and not financially secure enough to retire. He owned his small MSP for about 25 years and was simply tired of running it but did not want to walk away. I asked the natural question, “What will do you after you sell the business?”

His response was simple with a shrug of the shoulders. “I’ll take the money and buy another job.”

It was merely a job for him to bring home money and support his family, and he was perfectly content doing that.

He did not view his company as a business. It was merely a job for him to bring home money and support his family, and he was perfectly content doing that. Whether his job was an IT professional or a distributor of janitorial supplies, the result at the end of the day and week was the same. Instead of growing his business into a conglomerate that consumed his life, he chose to work enough to live his life and spend time with his family while still being able to support them financially.

When it is described in this manner, owning a job doesn’t seem so bad.

OWNING A LIFESTYLE

Lifestyle businesses are harder to identify than job ownership. A lifestyle business looks and acts like any other business. The only thing missing is profit. In a lifestyle business, you have customers, you may have employees, you read all the business books and implement changes to improve your profits, but the profits never seem to come, at least, not on the income statement, anyway.

The business is designed to cover lifestyle expenses.

It has nothing to do with the owner’s business savvy. The business is designed to cover lifestyle expenses. With IT companies, the owners and the kids always have the latest gadgets and computers. They are assets owned by the company. The owner leases or buys luxury cars, planes, or boats all with a business purpose. The business may be very involved in the community donating items, helping raise money, and calling it advertising. Every family vacation has a business purpose tied to it, so it turns into travel expenses. The kids are employed by the business, so their travel is deductible, too. The business would be profitable if it didn’t have a lifestyle to live up to. The more the business makes, the more the owners spend. It is all justified with saving money on taxes.

The expenses and deductions I mention above are completely legitimate business expenses. They also reduce income taxes, which is the secondary goal in a lifestyle business. The primary goal, which is also met, is that the owners get to live a life they want to live, and the company supports it.

Owning a Lifestyle is a fine way to live your life. It is only when you decide it is time to move on into the next chapter of your life that you need to find a way to extract yourself from the business that has provided so much to you and your family.

OWN A BUSINESS

Owning a business looks and feels different for each business owner. However, the goals are generally the same. When you own a business, you are invested in growing the company, improving profits, working with customers, and providing a great place to work for your people. If you are a business owner, chances are at least one of these is important to you.

Business owners are interested in improving processes, measuring gross and net profits, managing debt service, and keeping the company afloat, and hopefully, thriving. Businesses should be able to run without the owner.

Businesses should be able to run without the owner.

I worked with a business owner who had a heart attack. He was out of work for four months. His daughter had signature authority on the bank account. That’s how the business stayed open, but it continued to thrive without the owner there. The company went about its business of selling and installing products, serving the customers, and maintaining the financial records. When the owner returned four months later, he decided to step back from the business substantially and began preparing the company for sale. It was clear to him that his business was ready to operate without him. He also decided that he did not want to work his way into an early grave. Heart attacks have a way of exposing a person’s priorities in life.

Owning a business is crucial to selling a company. Buyers that are interested in your business are looking to buy a business, not a lifestyle, and certainly not a job.

CONVERTING TO A BUSINESS

Making the decision to convert from a job or lifestyle to a business is not always easy.

Making the decision to convert from a job or lifestyle to a business is not always easy. As you sort through the process, you will realize the benefits you have been enjoying now need to be stop or be paid by you and not the company.

I know one business owner who keeps about $1,000 in his personal checking account. The account balance remains consistent because payroll runs every two weeks. He uses his personal account to transfer money to savings and buy groceries. Everything else is paid with company money, including the mortgage.

For this company to sell with a decent valuation and cash buyout, the net profits need to increase from 2% to a minimum of 10%, preferably 15%. You might think the simple solution is to stop paying personal items with business money, and you are partially right, but it is complicated. The money must come from somewhere and the business is where the money is made. It stands to reason that the money still must come from the business.

The longer answer is that all expenses should be reviewed and normalized. Any disbursements that are personal should post to equity accounts and not expense accounts. This will immediately increase profits, which is your goal. At the same time, it will reduce your basis in the company because the company cash account is still paying for the purchase. This will increase your taxable gain when you sell the company, an unfortunate side effect of owner draws and shareholder distributions. The smarter answer is to increase salary to a living wage and pay the expenses from personal accounts.

LONG TERM GOALS

Determine your long-term goals. What do you want your company to look like in one year, three years, five years? If you own a job or lifestyle, keep your eye on the end game so you give yourself plenty of time to convert your company into a business. When preparing for sale, key factors are:

»  Recurring Revenue

»  Annual revenue growth trending over 3 years

»  Steady expenses

»  Net Profits of 10% or greater

Often, I meet business owners who were not looking to sell but were approached by a company waving a big check at them only to find out that the offer is rescinded or reduced significantly because profits are not there. Buyers will generally ask to see three years of financial data to make an offer. If you want to sell in the next few years, consider starting now to prepare.

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ABOUT THE AUTHOR

Rayanne Buchianico

Author – Rayanne Buchianico

Rayanne Buchianico provides MSP accounting and PSA Consulting services to IT Professionals and is the owner of ABC Solutions, LLC. Rayanne is a member of the ModernMSP community and a frequent contributor to the ModernMSP blog in addition to her own podcast, PSA Impact.