Do I want to grow equity in my small business?

Hi! I’m Patricia Bottero St-Jean
Founder of Open for Business.
So last week I was having a discussion with a friend,
who has been a business broker
for the past 25 or 30 years I think.
And we were chatting about equity in businesses
that are for resale.
So acquiring existing business might be one of your options.
Of course you could also start a business from zero
or develop a turnkey concept like a franchise.
But our discussion was about the misconceptions
about building equity in a business
and also a lot of people get into a business,
whether it’s an independent business, startup, or turnkey
like a franchise or business opportunity
or the acquisition of an existing business that is for sale.
Rarely do they think about how much equity they want to build,
and how much they want to recover of that initial investment.
When they are ready to exit and sell their business
at the end of their career in that business.
And that’s a shame because a lot of the decisions
should happen well before you start a business.
So one of the points that my friend was making was that
very few people who sell the business actually gain equity
or even sometimes even recover
their full initial investment.
And I believe the reason is that
they are not really thinking about equity
when they initially get into that business.
So some businesses depending on how you build them
you won’t recover any equity.
Other businesses, like an acquisition for example,
when you buy the business
if the business is already profitable
and cash flow positive,
chances are that this business is already optimized.
So here’s an example.
Let’s say, you’re considering a restaurant or a gym
or hair salon, for the sake of discussion.
And they… either one of them is busy at 80%
of it’s available resources,
you know of time and space.
What you buy when you’re acquiring that small business
that is already optimized,
you’re buying the fact that it is developed,
and it is positive cash flow.
So let’s say you pay $100,000 or $500,000
or even a million dollars for that cash flowing business.
Chances are if you maintain its exact same level
of profitability you’re not going to recover more than
what you already invested in it,
which means no equity for you.
You know it’s great if you recover,
of course you will have taken advantage of the cash flow
over all these years,
but this is something to consider.
And again, it’s not necessarily a reason
to not acquire a business
that is cash flowing and optimized.
The only way to think about how you could grow that equity
in that business above and beyond
what you’ve already paid for it,
is by expanding it, or scaling it, or growing it,
which will most likely will require more
than what your initial investment was.
So something to think about when you considering
an acquisition of a business or even when you’re thinking
of developing a brand new franchise
or a business opportunity.
People invest in 200K, 300K in a franchise
unless they are making this much
in sellers discretionary earning per year,
it will be challenging to recover multiple
of that investment in equity
and again in most cases and of course,
depending how you structure that business
and how it’s been run
and there are other factors
that we could discuss further later on.
But something to think about.
Another possibility on the other hand
let’s say you see people who invest cents on the dollar
in a business that is breaking even or even losing money.
That requires a lot of confidence,
but when you succeed in turning it around
then they can cash in on significant equity
when they sell it.
The point is thinking of equity in your business
how to build it and whether you want equity
or not is important.
It’s a key question you need to ask yourself
to consider well before you choose any business to start,
whether it’s a start up
independent business from ground zero from your idea,
or invest in a turnkey concept
or the acquisition of an existing business.
So I wanted to share that idea with you
because a lot of people don’t think about it.
So meanwhile, give me a comment if you enjoy this topic.
Let me know a few other topics you would like me to share.
I’d love to hear that from you too.
And if you do want to learn more about key considerations
before you transition to business ownership
you know equity is one of the many topics we cover
in my business ownership masterclass.
So feel free to send me an e-mail or go to my website.
It’s openforbusinesslab.com
and I hope to see you soon.
Meanwhile, cheers to building a life we love.
Take care.