January 10, 2024 • 24 mins
Today, we're delving into the often-overlooked aspect of business metrics — building wealth. Beyond the familiar trio of sales, profit, and cash, there's a fourth metric that holds the key to long-term success. Join us as we uncover the nuances of maximizing for Cash Cow or Valuation, and reveal the one business metric you might be ignoring to your detriment.
So many entrepreneurs embark on their business journey fueled by passion, sometimes neglecting a clear plan from the start. The fear of working hard with nothing to show for it is a common concern. In this episode, we address the importance of building wealth intentionally and curating it with care to ensure it's not a byproduct but a deliberate outcome.
Do you truly know your business model and how to maximize your wealth within it? We discuss the prevalent issue of entrepreneurs not fully comprehending their business models and offer insights into how to navigate this crucial aspect of business planning.
Beyond the immediate focus on sales, profit, and cash, we introduce the fourth metric — building wealth. Learn why it's a vital component of long-term success and how it can be strategically integrated into your business planning.
We explore the critical decision of whether to maximize your business as a Cash Cow or focus on Valuation. Understand the implications of this choice and gain insights into what you need to consider now for a prosperous future, especially five years down the line.
Connect with Us:
Share your thoughts on scaling client delivery with us on Instagram @pipharland and @iamgeorgiafitzgerald. At Scaling Simplified, we're dedicated to supporting fellow female business owners on the exciting journey beyond six figures and we always love to hear from you. 🚀💼
Find out more about our VIP days at https://www.georgiafitzgeraldcoaching.com/SS
#ScalingSimplified #BuildingWealth #BusinessMetrics
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Georgia (00:00):
Welcome back to this episode of Scaling Simplified and this could
be one of the most useful episodesyou could ever listen to in our series
and what we're talking about todayis what is your real business plan.
Are you maximizing for a cashcow business or as a valuation?
(00:23):
And what is the one financemetric that you are ignoring?
Which might all sound like aload of mumble jumble, and you're
wondering what I'm on about.
But what I'm talking about is this,if you are A small business owner, a
service based business, a product basedbusiness, and you are getting to this
point where you are hitting 250k inrevenue, maybe a little bit higher.
(00:47):
You are at the point whereyou really not need to start
thinking about what happens next.
Where is this business going?
And in this episode, we're goingto give you a bit of an overview of
the various options that you've got.
So we all know about sales.
We all know about profitcash, but Profit and cash.
But the fourth metric that we'retalking about is building wealth.
(01:09):
And this is what we'regoing to talk about today.
So Pip, why is it so important forpeople to start thinking about this?
Pip (01:18):
Oh, I love this topic so much.
And I totally agree that this is theepisode that may genuinely change the
entire trajectory of your business withlike over egging ourselves too much,
but we build businesses, don't we?
From a place of passion.
When you start a business, you'reso excited about your idea and you
throw everything into it to buildthe business and the life you want.
(01:40):
But once you start, you know, you've,you've put the business to the test
and it's starting to make money andyou've got that proven concept, you
have to understand where you're going,because we've worked so hard and often
for very little money in the firstplace that it seems to be a shame.
That we work this hard and we don'tget something out of it at the end.
And I see so many women who do this thatare running something from such a pace
(02:03):
of passion, but they're not creatingthe wealth that they deserve to create.
And that, quite frankly, they have earnedbecause they're not thinking about.
this longer plan.
So what we really want here is to helpyou ensure that you are working hard
towards a goal and that you really havesomething to show at the end of that.
Because I mean, quite frankly,if not, we might as well stay in
(02:27):
employment with a regular salary,someone paying our pension, all the
benefits, the company car, et cetera.
If we can't maximize the value fromour business, then what's the point?
And as entrepreneurs, we're oftenhiring other people and providing.
income to other people.
So we need to make sure thatwe're also setting ourselves up.
And this is really whereall of this comes in.
(02:47):
It's like, how are we settingourself and our business up to really
provide the future that we want?
I agree.
Georgia (02:53):
And I think one of the big things is that most people don't
actually know what kind of businessthey are setting up for themselves.
And to be really honest, buildingwealth does not just happen by accident.
There has to be a plan.
We've got to think aboutwhere we're going with this.
And this is really what we're tryingto talk about in this episode.
(03:18):
So.
, Pip, give us some of the options.
What could we do to
Pip (03:22):
build this wealth?
Okay.
So in general, there are twodifferent routes we can take.
Now there's obviously lots of nuance andlots of options within the options, but
generally we want to be thinking abouttaking one of these two approaches.
So the first approach is that we'rereally leveraging our business.
So we're really maximizing ourcashflow and our profitability.
(03:43):
Essentially, we're building a cash cow.
An income generating business and theaim of this is to maximize the amount
of profit that your business is making.
And then for us to extract that profitas business owners in a tax efficient
manner, and then invest this profit, thiscash into other wealth generating assets.
So it's basically your, your businessis making as much money as possible.
(04:07):
You're pulling out this moneyand then you're investing in
property and pensions and.
Stocks and shares or other businessesor however you want to spend your money.
So that's one option that we've got.
The other option is that we arebuilding a business to exit.
So we're really building that assetthat we can sell that's removed from us.
(04:27):
And obviously this is often whatwe think about for much bigger
businesses, you know, people talk about.
All these exits, but you canexit a small business too.
And I think there was a stat that I wasreading about this recently, that only 5
percent of small businesses actually exit.
And only 10 percent of those actuallyexit a fair valuation, which means that
as small business owners, we are leavingso much potential money on the table.
(04:51):
And so I think this is something thatI want to make sure that people really
understand is you, no matter how bigyour business is, you do not need to
be making millions of pounds a year.
to successfully exit your business.
You just need to be building thebusiness that is successful, that
somebody else wants to buy from you.
So in this case, we're reallythinking about how can we build
that business, which is sellable.
(05:11):
We then sell that business.
And then obviously you get a lump sumof cash or potentially get cash that
comes out, , over time, dependingon how you've structured the sale.
And then you've got that big lumpsum of cash to then invest in
the house, paying off your debts.
in the pension, in the stocks andshares, in whatever you want to,
however you want to spend your money.
(05:32):
So those are really the two differentdirections that you need to think
about and start thinking about whichone is maybe the right one for you.
Georgia (05:40):
And I think both options sound amazing, to be honest.
, but as we've said before,this is really about.
It's about you, how you want to bewithin your business, everything
that's happening around you inyour life as well and the kind of
lifestyle that you're trying to build.
So, and it also depends on the marginswithin your own business and the
business that you're running itself.
(06:01):
So, there's a couple of key differencesand a little caveat that this is quite
general and there will be lots ofexceptions to this, but we thought it
would be really useful to give you anoverview of the big differences between
Building a business to leverage itand building a business to exit it.
So PIV.
(06:21):
our resident money expert.
Give us a little rundown on the two.
Okay, so if we're building
Pip (06:28):
a cash cow type business, we're building a business that we
want to create lots of profit from.
We really need to focuson maximizing our profit.
So it's usually a business with relativelyhigh profit margins, often selling
relatively premium services or products.
Doesn't always be, but sometimesthis comes out in a lower sales
volume, but higher sales value.
(06:48):
So you're selling less, but you'reselling more like high ticket items.
Not always true though.
So that's one caveat there, but that'soften if your business does that, you're
more inclined to, to go down this route.
You'll also find that the businessesoften have lower net assets.
So.
Coming out of accounting speak,what does that actually mean?
That's that the value is often offeredthrough services rather than assets.
(07:11):
You don't have a lot ofstuff in your business.
You don't have buildings andbits of machinery and, you know,
products and all of these things.
A lot of the value that you're creatingis kind of created from your brain
and created kind of out of thin air asopposed to actual physical products.
There's also tends to be more relianceon you in this type of business
or highly skilled individuals.
(07:34):
So you might have people who arevery specialized in what they do.
There's, there's you who will bevery specialized in what you do.
And so you need specific individualsor a specific type of person, , to
keep the business running.
And so often, as you cansee, generally service based
businesses and agencies, etc.
fall very naturally into thiscategory, not to say that they
(07:56):
can't, you know, look to exit, butthis is generally kind of where the
service based businesses will fall.
Now, on the complete other hand,, businesses which are built, , more like
an asset and really with the view tosell in the long term, often a slightly
lower profit margin, although obviouslythe higher profit margin, the more money
you'll be able to get on sell and oftenhave a higher volume of transactions.
(08:17):
So think about.
Businesses which sell lots of productsor lots of lower value services.
You'll often also find that you willhave a high level of net assets.
So again, coming out of accounting speak,you have more infrastructure in place.
There's often more software, moresystems, more things, machinery.
There's just more.
stuff to the business to keep it running.
And the businesses like thisgenerally more easily run themselves.
(08:42):
So it's not one individual's amazingidea that's keeping the whole
business running or the skill thatonly they can bring to the table.
It is a system and a structurethat you slot people into to keep
the wheels turning as opposed to ahighly, highly specialized business.
So generally.
Product based businesses and SaaSbusinesses and things like that
(09:04):
will more naturally fall intobuilding a business for Exit.
Okay.
Georgia (09:10):
Amazing rundown.
And I think people are goingto be thinking, do I have to
decide at this point, whichbusiness model I'm going down?
And the point that we're trying tomake is you can change your mind, but
if you haven't even started thinkingabout these things, you're going to
be five steps behind anyone else.
(09:30):
So what we want you to do is to considerwhere might my business go in the future?
You know, some businesses will be suitedto one model far better than others, but
you can change that by the way you lookat the business, the systems you put in
place, the different things that you do.
, and really it's going to come downto your long term goals and what
kind of you want both now, but also.
(09:53):
In the future.
So we're thinking about what do I wantmy life to look like in the future?
Do I still want to be working thesame hours, days, weeks that I am
at the moment, or am I going to belooking for something else, like a
different way of juggling the two?
And then I think that your lifechanges are going to come into that.
Perhaps you started this business inyour 20s and now you've got married.
(10:16):
You are going to have some children.
You are thinking very differentlyabout how you want to interact
with your business or you'refurther on in your career.
And you're like, do you know what?
I've taken a great salaryfrom this for a while.
And now I want to thinkabout something else.
I'm going to travel more ordo something different or.
My husband won the lotteryor whatever it might be.
(10:40):
So whatever it is, the focus is slightlychanging and we're going to talk about
what to focus on for each of thesebusinesses in a second, but there's
a few things that you want to thinkabout before we get to that point.
Pip (10:55):
Yeah, and just to add into that, I think it's really important to
remember that you can have, you canstep away from both types of business.
So it's not a question of, do I want tobe really, really involved in the only
person driving the business forward?
You can set up a cash cow in a way thatyou're not involved in the day to day.
or you can sell a business.
So it's bringing together the typeof business model plus your life
(11:20):
and then figuring out the jigsawpieces and putting it together.
The options are endless.
It's just, you've got tostart thinking about them so
you know what your option is.
So diving back into the things we need tothink about before we specifically touch
on The two different types of business.
There's one overarching theorythat we need to pull all
together to make this happen.
(11:41):
And that's really a two step process.
So we need to think about how can wemaximize the value of our business?
And then how can we extract our wealthfrom that value that we've created?
So when you're maximizing the value ofyour business, and we'll go into the
details in a second, it's really importantto understand like your specific strategy
for this and not just copy what you think.
(12:02):
Other people are doing because it'sgoing to be really unique to your
business, but for your business, how canyou create as much value as possible?
And then when you get to the secondstep and you're starting to extract
our wealth, the business model andplan that you've got will depend the
timing of this, whether you're pullingout money more regularly or whether
you're keeping everything in yourbusiness and really investing in it
(12:22):
to get that large cash sum out later.
So it's really thinking about howam I doing this in the right way?
Okay, so let's dive into the first stepand that's all about maximizing the value
that we're creating in our business.
So if we are building more of acash cow, we really want to focus
(12:43):
on maximizing profitability.
That is the key focus forthis type of business model.
And I think what that means is
Georgia (12:51):
not necessarily stopping yourself from investing in your
business, but really thinkingabout whether those investments
are the right investments to make.
I think in the online space, wecan almost talk ourselves into
investing into anything, becauseit will all in some way be useful.
But if we're trying to maximizeon that profitability, what are
(13:14):
the non negotiable investments?
What are we really going to see adifference from, and what are the
things that are just nice to have?
And I think we'll dive intothat in more detail in a future
episode, but it's really analyzethose investments and really
Pip (13:27):
justify them.
Yeah, I completely agree.
And so when we're then thinking more froman exit perspective, so we're building a
business to exit, yes, we're focusing onprofitability, but we're focusing more
on overall value and building of assets.
So we're trying to maximize ourmargins, but we're doing it in a
way that's very, very sustainable.
(13:48):
So sometimes those bigger investments.
are necessary to make sure that thosemargins can be retained for years to come.
And this often looks like building inrecurring revenue sources, and really
focusing on creating consistent profitand working capital in your business,
because that's something that a buyerwill be looking over your accounts for
several years to ensure that you'vegot that consistency and stability.
(14:12):
In your business, they want a businessthat they know is going to continue
to perform where with a cash cow, wewant everything to perform right now.
And we're almost taking a slightly longhit on the longterm in order to maximize
the short term, because we know we're notnecessarily going to be in that business
in 25 years time, which is very differentfrom the exit strategy where we're hoping
(14:33):
our business will still be here in 25years time, just not with us at the helm.
And I think
Georgia (14:37):
that is really, really key.
We need to remove the reliance onindividuals within that business.
So if you are a service based businessand you are in quotation marks, the
business, and you want to exit, then shortof selling yourself to your buyer, it's,
there's no value there because you are thesole person that the business hangs on.
(14:59):
So the sooner you can start to removethat reliance on you for generating the
income, but it's the same within all sortsof different members of, of, of the team
and the people in the way things work.
So it's, it's more around creatingan amazing system of outcomes that
other teams could come in and dorather than it just be down to you.
So in that respect, we're also thinkingabout investing in our systems, , putting
(15:23):
in all those SOPs, making it somethingthat it's easy to take on and run without
full training from the existing team.
You know, all that support is there.
There's no bottlenecks in that machine.
The business is running really smoothly.
So I think even at this stage for anybusiness, it's important to think.
(15:43):
Could this business run without me in it?
And are the systems in there supporting?
If, you know, even if I had to takelong term six, which we've discussed
in, in other episodes, it's such agood thing to start thinking about
whatever your strategy is going to be.
Yes,
Pip (16:00):
preach.
Totally agree on that.
Having the business machine workingfor you is such a lifesaver just in
the short term, but it opens up so manyopportunities for the long term too.
So then, moving on to the second stepis all about extracting that value
that you've built in your business.
Now this is...
Pretty straightforward and literallythe aim is to take out as much cash
(16:22):
as you can from your business, right?
But you need to be quite clever inthe way that you're doing this and
this is definitely where I will alwayssay Get professional advice get the
tax advisor to come and help youbecause every business is different
Every jurisdiction is different.
Everybody's personal financial situationis different So don't just copy and paste
something that you see make sure it'stailored to you But essentially for a
(16:47):
cash cow type of business, we're going tobe a bit more aggressive in pulling out
our profits earlier on in the business.
So it's all about extracting thoseprofits in the most efficient manner.
So this might be putting money into yourpension, which is a tax allowable expense.
So it's reducing yourcorporation tax to your business.
It might be payingyourself a salary again.
(17:08):
You're allowed to pay yourself.
And that's, that comesbefore taxing your business.
It might be understanding what personaluse assets or what bills that you're
spending money on in your house thatactually could be running through the
business and really thinking about howcan I get the most out of my business
here and maximize the profit I'm taking.
You also want to be thinking about howyou're extracting out any cash that
(17:31):
isn't going into pensions or private useassets or company cars or what have you.
, and, and the figuring out whetheryou're pulling it out through
a salary, through a salary anddividends, just through dividends.
And this is something, again, youneed to speak to your accountant about
because with all the corporation tax.
band rates changing andmarginal relief coming in.
So if you earn profits between 50k and250k, you will effectively have a slightly
(17:54):
higher rate of tax than if you are earninga little bit more or a little bit less.
So you really want to think smartlyabout how you're paying yourself.
So you are not payingmore tax than you need to.
And finding that balance betweenwhat's paid a salary and what's paid as
dividends is really important for you.
So it's, it's all of these littlethings about how can I Pull out as
much money as the business can allowme to take out without me damaging the
(18:17):
business, but really, really regularly.
And then when I've pulled that money out,what am I actually investing that in?
As we've talked about before, wedon't want that to just sit in a
bank account and lose money withinterest rates and inflation.
We want to think about what,how we're creating that wealth.
And so that might be puttingsome of the money in savings in
(18:38):
a high interest savings accounts.
You've got, you know, the rainy dayfunds, but it might also be about.
clearing debt that you've got mortgages,student loans, it might be investing
in property, it might be investingin stocks and shares or purchasing
other businesses, , you know, puttingmoney in pensions, it'll look really
different for every individual.
And again, this is where getting awealth advisor is such a good idea,
(18:59):
but it's about thinking about what.
Your plan is because what I wantto do with my money is going to
be really different to Georgia.
Say what you want to do with your money.
And, you know, for me, I've decided I'mless interested investing in pension,
but I'm investing in property instead.
But if I was in my fifties or sixtiesand I had a family, I'd probably be
(19:20):
investing in a very different way.
You know, it really dependsas you as an individual.
So I think it's really understanding foryou, how can you pull that profit out?
And then what can you doto maximize that profit?
Now, on the other hand, if youare building to exit, you're not
going to be thinking about how muchprofit can I pull out right now.
You're going to be much more modest inthat and much more regular in the way
(19:43):
that you pull out cash because ultimately,often when people buy your business,
they want to know that they can putsomeone in place to run your business.
Often the person buying yourbusiness is not going to be the
person running your business.
They're going to want to hiresomebody to run your business.
So if you are paying yourselfconsistently, but not a crazy amount.
They've essentially got your salaryalready accounted for and so they'll
(20:06):
know I can bring somebody in andthey'll run the business a little bit
like Pip used to run the business.
And so it's really thinking aboutthat consistency that you also want
to think about different ways thatyou might sell your business and we'll
dive into this in a different episode.
So do not worry if asset sales and sharesales and all these things that people
talk about are going straight over yourhead because we'll dive into what this
(20:27):
means and what might be right for you.
But I think it's really importantthat we understand these things.
So it gives us the options aboutwhere we want to take things.
We also want to think about when weget to that point of sale is, you know,
how can we maximize any tax allowances?
So it might be, , pulling outcash beforehand and payments.
(20:47):
There's, , business asset disposalrelief, the ADR that we need to
make sure that we're getting.
So again, Being a step ahead andstarting to think about these things
before at sale is a really good idea.
So we can make sure that in the yearor two run up to selling the business,
we've got all of our ducks in a rowand we're actually maximizing for
whatever sales structure there might be.
(21:07):
And again, this is where.
Getting some specific advice will make,honestly, as I've seen with some of
my clients, hundreds of thousands ofpounds of difference in the amount you
are going to sell your business for, ifnot more, if you're selling, you know,
at seven and eight figure multiples.
So it's really just thinking abouthere, being much more consistent in
(21:27):
extracting a profit and making surethat you really are showing that
consistency for any future seller.
Georgia (21:33):
Pip, I love how knowledgeable you are on this and, , I think you're all
getting the impression that actually Pip'squite obsessed with this and enjoys it so
Pip (21:40):
much.
But
, , Georgia (21:43):
hopefully that has been really eye opening in terms of the
two different options at a top leveland we're going to go into more
detail of this and in future episodes.
But to just kind of summarize thiswhistle stop tour, , the things
that we're thinking about are numberone, understand your business model.
Is it cashflow or valuation?
(22:03):
Number two is you wantto maximize your value.
So we're maximizing profitabilityor we're maximizing value or both.
We're like thinking about wherewe are within, within our model.
And then We're extracting any of theprofit in the most tax efficient manner
that we can to keep that sale valuehigh, to keep the objectives that
(22:24):
we're aiming for fresh in our mind.
Now, this might all seem a bitoverwhelming, but it's also so exciting
thinking about how you can build thatwealth in your business and what,
what your future plans might be.
I imagine at the moment youlove running your business
and you enjoy the day to day.
But as we've alluded to, life canchange, different things come in,
(22:45):
you know, you might want to movein a slightly different direction.
So starting to think about, okay, whatdo I want to be doing in five years is
really interesting when you start thinkingabout your personal business strategy.
And this is exactly what we're goingto be dealing with in our VIP days.
We'll be diving into this and lotsmore of the detail that's going
(23:05):
to be really relevant to you.
So that you can build a strategyand a structure that's going to
take you in the right direction.
Welcome back to this episode of Scaling Simplified and this could
be one of the most useful episodesyou could ever listen to in our series
and what we're talking about todayis what is your real business plan.
Are you maximizing for a cashcow business or as a valuation?
(00:23):
And what is the one financemetric that you are ignoring?
Which might all sound like aload of mumble jumble, and you're
wondering what I'm on about.
But what I'm talking about is this,if you are A small business owner, a
service based business, a product basedbusiness, and you are getting to this
point where you are hitting 250k inrevenue, maybe a little bit higher.
(00:47):
You are at the point whereyou really not need to start
thinking about what happens next.
Where is this business going?
And in this episode, we're goingto give you a bit of an overview of
the various options that you've got.
So we all know about sales.
We all know about profitcash, but Profit and cash.
But the fourth metric that we'retalking about is building wealth.
(01:09):
And this is what we'regoing to talk about today.
So Pip, why is it so important forpeople to start thinking about this?
Pip (01:18):
Oh, I love this topic so much.
And I totally agree that this is theepisode that may genuinely change the
entire trajectory of your business withlike over egging ourselves too much,
but we build businesses, don't we?
From a place of passion.
When you start a business, you'reso excited about your idea and you
throw everything into it to buildthe business and the life you want.
(01:40):
But once you start, you know, you've,you've put the business to the test
and it's starting to make money andyou've got that proven concept, you
have to understand where you're going,because we've worked so hard and often
for very little money in the firstplace that it seems to be a shame.
That we work this hard and we don'tget something out of it at the end.
And I see so many women who do this thatare running something from such a pace
(02:03):
of passion, but they're not creatingthe wealth that they deserve to create.
And that, quite frankly, they have earnedbecause they're not thinking about.
this longer plan.
So what we really want here is to helpyou ensure that you are working hard
towards a goal and that you really havesomething to show at the end of that.
Because I mean, quite frankly,if not, we might as well stay in
(02:27):
employment with a regular salary,someone paying our pension, all the
benefits, the company car, et cetera.
If we can't maximize the value fromour business, then what's the point?
And as entrepreneurs, we're oftenhiring other people and providing.
income to other people.
So we need to make sure thatwe're also setting ourselves up.
And this is really whereall of this comes in.
(02:47):
It's like, how are we settingourself and our business up to really
provide the future that we want?
I agree.
Georgia (02:53):
And I think one of the big things is that most people don't
actually know what kind of businessthey are setting up for themselves.
And to be really honest, buildingwealth does not just happen by accident.
There has to be a plan.
We've got to think aboutwhere we're going with this.
And this is really what we're tryingto talk about in this episode.
(03:18):
So.
, Pip, give us some of the options.
What could we do to
Pip (03:22):
build this wealth?
Okay.
So in general, there are twodifferent routes we can take.
Now there's obviously lots of nuance andlots of options within the options, but
generally we want to be thinking abouttaking one of these two approaches.
So the first approach is that we'rereally leveraging our business.
So we're really maximizing ourcashflow and our profitability.
(03:43):
Essentially, we're building a cash cow.
An income generating business and theaim of this is to maximize the amount
of profit that your business is making.
And then for us to extract that profitas business owners in a tax efficient
manner, and then invest this profit, thiscash into other wealth generating assets.
So it's basically your, your businessis making as much money as possible.
(04:07):
You're pulling out this moneyand then you're investing in
property and pensions and.
Stocks and shares or other businessesor however you want to spend your money.
So that's one option that we've got.
The other option is that we arebuilding a business to exit.
So we're really building that assetthat we can sell that's removed from us.
(04:27):
And obviously this is often whatwe think about for much bigger
businesses, you know, people talk about.
All these exits, but you canexit a small business too.
And I think there was a stat that I wasreading about this recently, that only 5
percent of small businesses actually exit.
And only 10 percent of those actuallyexit a fair valuation, which means that
as small business owners, we are leavingso much potential money on the table.
(04:51):
And so I think this is something thatI want to make sure that people really
understand is you, no matter how bigyour business is, you do not need to
be making millions of pounds a year.
to successfully exit your business.
You just need to be building thebusiness that is successful, that
somebody else wants to buy from you.
So in this case, we're reallythinking about how can we build
that business, which is sellable.
(05:11):
We then sell that business.
And then obviously you get a lump sumof cash or potentially get cash that
comes out, , over time, dependingon how you've structured the sale.
And then you've got that big lumpsum of cash to then invest in
the house, paying off your debts.
in the pension, in the stocks andshares, in whatever you want to,
however you want to spend your money.
(05:32):
So those are really the two differentdirections that you need to think
about and start thinking about whichone is maybe the right one for you.
Georgia (05:40):
And I think both options sound amazing, to be honest.
, but as we've said before,this is really about.
It's about you, how you want to bewithin your business, everything
that's happening around you inyour life as well and the kind of
lifestyle that you're trying to build.
So, and it also depends on the marginswithin your own business and the
business that you're running itself.
(06:01):
So, there's a couple of key differencesand a little caveat that this is quite
general and there will be lots ofexceptions to this, but we thought it
would be really useful to give you anoverview of the big differences between
Building a business to leverage itand building a business to exit it.
So PIV.
(06:21):
our resident money expert.
Give us a little rundown on the two.
Okay, so if we're building
Pip (06:28):
a cash cow type business, we're building a business that we
want to create lots of profit from.
We really need to focuson maximizing our profit.
So it's usually a business with relativelyhigh profit margins, often selling
relatively premium services or products.
Doesn't always be, but sometimesthis comes out in a lower sales
volume, but higher sales value.
(06:48):
So you're selling less, but you'reselling more like high ticket items.
Not always true though.
So that's one caveat there, but that'soften if your business does that, you're
more inclined to, to go down this route.
You'll also find that the businessesoften have lower net assets.
So.
Coming out of accounting speak,what does that actually mean?
That's that the value is often offeredthrough services rather than assets.
(07:11):
You don't have a lot ofstuff in your business.
You don't have buildings andbits of machinery and, you know,
products and all of these things.
A lot of the value that you're creatingis kind of created from your brain
and created kind of out of thin air asopposed to actual physical products.
There's also tends to be more relianceon you in this type of business
or highly skilled individuals.
(07:34):
So you might have people who arevery specialized in what they do.
There's, there's you who will bevery specialized in what you do.
And so you need specific individualsor a specific type of person, , to
keep the business running.
And so often, as you cansee, generally service based
businesses and agencies, etc.
fall very naturally into thiscategory, not to say that they
(07:56):
can't, you know, look to exit, butthis is generally kind of where the
service based businesses will fall.
Now, on the complete other hand,, businesses which are built, , more like
an asset and really with the view tosell in the long term, often a slightly
lower profit margin, although obviouslythe higher profit margin, the more money
you'll be able to get on sell and oftenhave a higher volume of transactions.
(08:17):
So think about.
Businesses which sell lots of productsor lots of lower value services.
You'll often also find that you willhave a high level of net assets.
So again, coming out of accounting speak,you have more infrastructure in place.
There's often more software, moresystems, more things, machinery.
There's just more.
stuff to the business to keep it running.
And the businesses like thisgenerally more easily run themselves.
(08:42):
So it's not one individual's amazingidea that's keeping the whole
business running or the skill thatonly they can bring to the table.
It is a system and a structurethat you slot people into to keep
the wheels turning as opposed to ahighly, highly specialized business.
So generally.
Product based businesses and SaaSbusinesses and things like that
(09:04):
will more naturally fall intobuilding a business for Exit.
Okay.
Georgia (09:10):
Amazing rundown.
And I think people are goingto be thinking, do I have to
decide at this point, whichbusiness model I'm going down?
And the point that we're trying tomake is you can change your mind, but
if you haven't even started thinkingabout these things, you're going to
be five steps behind anyone else.
(09:30):
So what we want you to do is to considerwhere might my business go in the future?
You know, some businesses will be suitedto one model far better than others, but
you can change that by the way you lookat the business, the systems you put in
place, the different things that you do.
, and really it's going to come downto your long term goals and what
kind of you want both now, but also.
(09:53):
In the future.
So we're thinking about what do I wantmy life to look like in the future?
Do I still want to be working thesame hours, days, weeks that I am
at the moment, or am I going to belooking for something else, like a
different way of juggling the two?
And then I think that your lifechanges are going to come into that.
Perhaps you started this business inyour 20s and now you've got married.
(10:16):
You are going to have some children.
You are thinking very differentlyabout how you want to interact
with your business or you'refurther on in your career.
And you're like, do you know what?
I've taken a great salaryfrom this for a while.
And now I want to thinkabout something else.
I'm going to travel more ordo something different or.
My husband won the lotteryor whatever it might be.
(10:40):
So whatever it is, the focus is slightlychanging and we're going to talk about
what to focus on for each of thesebusinesses in a second, but there's
a few things that you want to thinkabout before we get to that point.
Pip (10:55):
Yeah, and just to add into that, I think it's really important to
remember that you can have, you canstep away from both types of business.
So it's not a question of, do I want tobe really, really involved in the only
person driving the business forward?
You can set up a cash cow in a way thatyou're not involved in the day to day.
or you can sell a business.
So it's bringing together the typeof business model plus your life
(11:20):
and then figuring out the jigsawpieces and putting it together.
The options are endless.
It's just, you've got tostart thinking about them so
you know what your option is.
So diving back into the things we need tothink about before we specifically touch
on The two different types of business.
There's one overarching theorythat we need to pull all
together to make this happen.
(11:41):
And that's really a two step process.
So we need to think about how can wemaximize the value of our business?
And then how can we extract our wealthfrom that value that we've created?
So when you're maximizing the value ofyour business, and we'll go into the
details in a second, it's really importantto understand like your specific strategy
for this and not just copy what you think.
(12:02):
Other people are doing because it'sgoing to be really unique to your
business, but for your business, how canyou create as much value as possible?
And then when you get to the secondstep and you're starting to extract
our wealth, the business model andplan that you've got will depend the
timing of this, whether you're pullingout money more regularly or whether
you're keeping everything in yourbusiness and really investing in it
(12:22):
to get that large cash sum out later.
So it's really thinking about howam I doing this in the right way?
Okay, so let's dive into the first stepand that's all about maximizing the value
that we're creating in our business.
So if we are building more of acash cow, we really want to focus
(12:43):
on maximizing profitability.
That is the key focus forthis type of business model.
And I think what that means is
Georgia (12:51):
not necessarily stopping yourself from investing in your
business, but really thinkingabout whether those investments
are the right investments to make.
I think in the online space, wecan almost talk ourselves into
investing into anything, becauseit will all in some way be useful.
But if we're trying to maximizeon that profitability, what are
(13:14):
the non negotiable investments?
What are we really going to see adifference from, and what are the
things that are just nice to have?
And I think we'll dive intothat in more detail in a future
episode, but it's really analyzethose investments and really
Pip (13:27):
justify them.
Yeah, I completely agree.
And so when we're then thinking more froman exit perspective, so we're building a
business to exit, yes, we're focusing onprofitability, but we're focusing more
on overall value and building of assets.
So we're trying to maximize ourmargins, but we're doing it in a
way that's very, very sustainable.
(13:48):
So sometimes those bigger investments.
are necessary to make sure that thosemargins can be retained for years to come.
And this often looks like building inrecurring revenue sources, and really
focusing on creating consistent profitand working capital in your business,
because that's something that a buyerwill be looking over your accounts for
several years to ensure that you'vegot that consistency and stability.
(14:12):
In your business, they want a businessthat they know is going to continue
to perform where with a cash cow, wewant everything to perform right now.
And we're almost taking a slightly longhit on the longterm in order to maximize
the short term, because we know we're notnecessarily going to be in that business
in 25 years time, which is very differentfrom the exit strategy where we're hoping
(14:33):
our business will still be here in 25years time, just not with us at the helm.
And I think
Georgia (14:37):
that is really, really key.
We need to remove the reliance onindividuals within that business.
So if you are a service based businessand you are in quotation marks, the
business, and you want to exit, then shortof selling yourself to your buyer, it's,
there's no value there because you are thesole person that the business hangs on.
(14:59):
So the sooner you can start to removethat reliance on you for generating the
income, but it's the same within all sortsof different members of, of, of the team
and the people in the way things work.
So it's, it's more around creatingan amazing system of outcomes that
other teams could come in and dorather than it just be down to you.
So in that respect, we're also thinkingabout investing in our systems, , putting
(15:23):
in all those SOPs, making it somethingthat it's easy to take on and run without
full training from the existing team.
You know, all that support is there.
There's no bottlenecks in that machine.
The business is running really smoothly.
So I think even at this stage for anybusiness, it's important to think.
(15:43):
Could this business run without me in it?
And are the systems in there supporting?
If, you know, even if I had to takelong term six, which we've discussed
in, in other episodes, it's such agood thing to start thinking about
whatever your strategy is going to be.
Yes,
Pip (16:00):
preach.
Totally agree on that.
Having the business machine workingfor you is such a lifesaver just in
the short term, but it opens up so manyopportunities for the long term too.
So then, moving on to the second stepis all about extracting that value
that you've built in your business.
Now this is...
Pretty straightforward and literallythe aim is to take out as much cash
(16:22):
as you can from your business, right?
But you need to be quite clever inthe way that you're doing this and
this is definitely where I will alwayssay Get professional advice get the
tax advisor to come and help youbecause every business is different
Every jurisdiction is different.
Everybody's personal financial situationis different So don't just copy and paste
something that you see make sure it'stailored to you But essentially for a
(16:47):
cash cow type of business, we're going tobe a bit more aggressive in pulling out
our profits earlier on in the business.
So it's all about extracting thoseprofits in the most efficient manner.
So this might be putting money into yourpension, which is a tax allowable expense.
So it's reducing yourcorporation tax to your business.
It might be payingyourself a salary again.
(17:08):
You're allowed to pay yourself.
And that's, that comesbefore taxing your business.
It might be understanding what personaluse assets or what bills that you're
spending money on in your house thatactually could be running through the
business and really thinking about howcan I get the most out of my business
here and maximize the profit I'm taking.
You also want to be thinking about howyou're extracting out any cash that
(17:31):
isn't going into pensions or private useassets or company cars or what have you.
, and, and the figuring out whetheryou're pulling it out through
a salary, through a salary anddividends, just through dividends.
And this is something, again, youneed to speak to your accountant about
because with all the corporation tax.
band rates changing andmarginal relief coming in.
So if you earn profits between 50k and250k, you will effectively have a slightly
(17:54):
higher rate of tax than if you are earninga little bit more or a little bit less.
So you really want to think smartlyabout how you're paying yourself.
So you are not payingmore tax than you need to.
And finding that balance betweenwhat's paid a salary and what's paid as
dividends is really important for you.
So it's, it's all of these littlethings about how can I Pull out as
much money as the business can allowme to take out without me damaging the
(18:17):
business, but really, really regularly.
And then when I've pulled that money out,what am I actually investing that in?
As we've talked about before, wedon't want that to just sit in a
bank account and lose money withinterest rates and inflation.
We want to think about what,how we're creating that wealth.
And so that might be puttingsome of the money in savings in
(18:38):
a high interest savings accounts.
You've got, you know, the rainy dayfunds, but it might also be about.
clearing debt that you've got mortgages,student loans, it might be investing
in property, it might be investingin stocks and shares or purchasing
other businesses, , you know, puttingmoney in pensions, it'll look really
different for every individual.
And again, this is where getting awealth advisor is such a good idea,
(18:59):
but it's about thinking about what.
Your plan is because what I wantto do with my money is going to
be really different to Georgia.
Say what you want to do with your money.
And, you know, for me, I've decided I'mless interested investing in pension,
but I'm investing in property instead.
But if I was in my fifties or sixtiesand I had a family, I'd probably be
(19:20):
investing in a very different way.
You know, it really dependsas you as an individual.
So I think it's really understanding foryou, how can you pull that profit out?
And then what can you doto maximize that profit?
Now, on the other hand, if youare building to exit, you're not
going to be thinking about how muchprofit can I pull out right now.
You're going to be much more modest inthat and much more regular in the way
(19:43):
that you pull out cash because ultimately,often when people buy your business,
they want to know that they can putsomeone in place to run your business.
Often the person buying yourbusiness is not going to be the
person running your business.
They're going to want to hiresomebody to run your business.
So if you are paying yourselfconsistently, but not a crazy amount.
They've essentially got your salaryalready accounted for and so they'll
(20:06):
know I can bring somebody in andthey'll run the business a little bit
like Pip used to run the business.
And so it's really thinking aboutthat consistency that you also want
to think about different ways thatyou might sell your business and we'll
dive into this in a different episode.
So do not worry if asset sales and sharesales and all these things that people
talk about are going straight over yourhead because we'll dive into what this
(20:27):
means and what might be right for you.
But I think it's really importantthat we understand these things.
So it gives us the options aboutwhere we want to take things.
We also want to think about when weget to that point of sale is, you know,
how can we maximize any tax allowances?
So it might be, , pulling outcash beforehand and payments.
(20:47):
There's, , business asset disposalrelief, the ADR that we need to
make sure that we're getting.
So again, Being a step ahead andstarting to think about these things
before at sale is a really good idea.
So we can make sure that in the yearor two run up to selling the business,
we've got all of our ducks in a rowand we're actually maximizing for
whatever sales structure there might be.
(21:07):
And again, this is where.
Getting some specific advice will make,honestly, as I've seen with some of
my clients, hundreds of thousands ofpounds of difference in the amount you
are going to sell your business for, ifnot more, if you're selling, you know,
at seven and eight figure multiples.
So it's really just thinking abouthere, being much more consistent in
(21:27):
extracting a profit and making surethat you really are showing that
consistency for any future seller.
Georgia (21:33):
Pip, I love how knowledgeable you are on this and, , I think you're all
getting the impression that actually Pip'squite obsessed with this and enjoys it so
Pip (21:40):
much.
But
, , Georgia (21:43):
hopefully that has been really eye opening in terms of the
two different options at a top leveland we're going to go into more
detail of this and in future episodes.
But to just kind of summarize thiswhistle stop tour, , the things
that we're thinking about are numberone, understand your business model.
Is it cashflow or valuation?
(22:03):
Number two is you wantto maximize your value.
So we're maximizing profitabilityor we're maximizing value or both.
We're like thinking about wherewe are within, within our model.
And then We're extracting any of theprofit in the most tax efficient manner
that we can to keep that sale valuehigh, to keep the objectives that
(22:24):
we're aiming for fresh in our mind.
Now, this might all seem a bitoverwhelming, but it's also so exciting
thinking about how you can build thatwealth in your business and what,
what your future plans might be.
I imagine at the moment youlove running your business
and you enjoy the day to day.
But as we've alluded to, life canchange, different things come in,
(22:45):
you know, you might want to movein a slightly different direction.
So starting to think about, okay, whatdo I want to be doing in five years is
really interesting when you start thinkingabout your personal business strategy.
And this is exactly what we're goingto be dealing with in our VIP days.
We'll be diving into this and lotsmore of the detail that's going
(23:05):
to be really relevant to you.
So that you can build a strategyand a structure that's going to
take you in the right direction.
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