Lots of people write about starting a business. Few talk about how rare and difficult it is to exit one profitably. According to U.K. statistics, approx. 40% of new businesses fail in the first three years, and 60% close their doors in the first five years. A serious reality check is required if starting a business is part of your 'wealth planning'.
Starting a business for lifestyle reasons is a perfectly valid choice. However, if you envisage selling it at some point, you might not get much, if anything, for it. I have looked at multiple small businesses over the years, and the reality is that few of them do more than provide their owners with a modestly-paid job. Not only will their value be limited at sale time, but if they involve property or leased equipment, you could easily find yourself personally liable for the debts if you can't find a buyer and want to close the business.
Typically, the only businesses that can create real wealth toward retirement have to be scalable. Only 4% of UK companies have over £1 million sales, and the average margin is 9.3%. It doesn't leave much in profits for even the more successful entrepreneurs. Digital businesses can offer more leverage in both directions. They are potentially easier to scale, but barriers to competition are often lower, and capital demands are higher. How often have I heard, 'We just need to invest another x amount in the website, and all the sales will flow to the bottom line.'
Whatever the business, if you plan to exit at some point, you almost always need to build scalability into the business design more or less from the start. Scalability applies to the business model, technology and building a management team to make the founder redundant eventually! People-based businesses are notoriously difficult to scale as growth is tied to hiring and retaining skilled staff, constraining billable hours.
As a successful exited founder, a business angel and an advisor, I am well aware of the entrepreneurial hype that encourages almost everyone to start their own business and become rich. Starting your own business is not for everyone, and it is really important to be clear about your motivations before you start because exiting can be harder than starting! #business#entrepreneur#businessexit#management#smebusiness
