I have had several recent conversations with growth business owners and founders about their concerns about covering their personal costs and their reticence do something about it. Admittedly, they were individuals with higher-than-average incomes and personal costs, but the same issue applies to many founders and people in business with incomes across the spectrum. How do you find a financial and life balance between sacrifice today for a very uncertain future return? I have also experienced many of these issues personally over the years.
Asset rich and cash poor is the typical status for the wealthy and anyone building a business. However, the so-called asset may be still an early-stage business and a share certificate that represents not much more than ambition and hope value. I have had a few of those myself over the years. That asset may also be an established business facing difficulty as a term loan nears its repayment date when revenues are down and both interest rates and operating costs are up leading to financial uncertainty in the hands of a bank. I read a quote somewhere that I am not going to look up that said something along the lines of entrepreneurs and business owners (they are not necessarily the same thing) are willing to give up time today for financial security tomorrow. At the same time, I recall that my parents always reminded me of the old adage that tomorrow never comes.
The road to success in business involves difficult financial decisions and sacrifices that can impact a business owner’s colleagues, family and friends. The trade of giving up a steady income today for future financial security doesn’t always work out and, in most cases, you can’t close out the trade when you wanted to. Along the way relationships with partners, children, friends and business partners can become casualties of what may very well be a noble ambition to change the world for the better.
You must find balance. You must be willing to fight your corner with stakeholders who may expect you to work for very little, or free. You will be unable to give your business the attention and focus it requires if you are concerned about paying your energy bills. Wellbeing combines the state of your physical, mental and financial health to ensure that your financial and metal health are protected. At times, I have experienced all three in the gutter and it can be a long road back for many. Most business success stories include period of difficulty and adversity.
You have to ensure that you manage your finances and have a plan if and when you generate material income or a capital return. I often meet young people at events who want to be footballers. I never dissuade them from that ambition, as what do I know, but I often gently recommend a back-up plan. I have met many former professional footballers and athletes who had to give up on their dream due to an injury or a family issue.
I am often told that a business is profitable or that it is ‘washing its face’, but when I ask whether the person running the business is being paid, they explain that they are still not taking a salary to cover their personal costs. It is even seen as a badge of honour and possible underlying financial distress and growing personal debt is hidden. That makes no sense.
No plan survives contact with the enemy. Leaving a job with even the best of plans and financing in place is still a risk. Past success does not guarantee future success and a career in an industry doesn’t necessarily mean that you will succeed building a business. One of the key factors to business success is purely timing and no individual controls markets, technological advancements, weather or even pandemics.
If you are working and want to start a business, remain in employment for as long as possible. Don’t have a side hustle, take you side business seriously and make the move when you can afford to – financially and in terms of the impact on your family and relationships. Save and don’t rush out and buy shiny depreciating assets as soon as you can. If you make some money betting on red, do not place it all again on the same colour again. Take some of the table and invest it or save it for a rainy day, as one will come.
As Albert Einstein famously noted, and Warrant Buffett preaches, compound interest is a powerful force. Children are still going to need an education, a car and somewhere to live despite the outcome of your business endeavours. Your parents will age, and anyone can get ill. Ensure you have the insurance you should have and be responsible. Manage and mitigate risk along the way.
Know when to stop and cut your losses, which is something experience teaches you, even if the conversations with stakeholders will be difficult, as it will only get worse. Seek third party investment instead of soaking up all of your own financial resources – share the risk and the upside and build sensible salaries into your financial model. Unvested options are not going to pay the mortgage.
In the UK there is pressure to hang on to all of your equity until the day of some future liquidity event (exit). Banks will seek covenants that restrict salaries and even dividend payments. Bankers on IPOs explain that you shouldn’t sell any shares as it sends the wrong signal to new investors. If that is the case, my advice is to hire new bankers. In the US, investors will actively encourage management to take money off the table so that they can live in more financial comfort and focus on the business.
I just wanted to share some thoughts on this recurring theme and would love to hear your thoughts, experiences and how you have found, or would seek, balance.