If you own a business, is it a lifestyle business or is it an investible business? If you don’t know the difference, a lifestyle business generates enough income to support your lifestyle but it’s very hard to sell because most buyers will only pay three to five times the annual income of the business. So if your business, after your salary and benefits, is only generating $50,000 in annual income, you would likely only get $150,000- $250,000 for the business and you can’t retire on that.
On the other hand, an investible business is a business you can sell for a tidy profit and retire or move on to another venture. To have an investible business you must generate enough income that you can retire off of the purchase price. To do that, you have to have significant revenue and profits and you also need to have a strong management team that can run the business when you leave. Financial buyers don’t want to buy a business that they will have to spend a lot of time on after closing. Also, the more up-to-date your technology, facilities and business processes are, the more you will get for your business.
In my book I devote a chapter to running your business like you are going to sell it tomorrow. We recently sold our family business and we were able to do so in a relatively short period of time because we always ran it as if we were going to sell it. We had audited statements for the 20 years we were in business, all of the corporate minutes, and a very strong and diverse management team. The buyer was surprised to see our diverse workforce and how many young people we had, in a business known for being male, stale and pale.
Even if you have no intention of selling your business, if you run it in such a way that you could sell it quickly if you got a great offer, like we did, it makes things much easier. We were not looking to sell but were approached by a private equity group that had a platform company interested in the footprint of our business. We had 11 locations from Raleigh, North Carolina, to Ponte Vedra, Florida. We had a strong management team, great locations, a modern fleet of delivery trucks and above-average profits. All of those things combined for a quick and profitable sale.
There’s nothing wrong with a lifestyle business as long as you know it is a lifestyle business. I have known many people in my career who thought they could sell their business to fund their retirement, only to find out that the sale price would only support them for a few years or, in some cases, no one was interested at all because the principal of the business was the business. There wasn’t a strong management team to run it after a sale, so no one wanted to buy it. In most of those cases those people ended up liquidating for pennies on the dollar.
If you own a business and you don’t know if it’s a lifestyle business or an investible business, set aside some time to think about it, and if you come to the realization that you have a lifestyle business but you want to become an investible business so that you can sell and retire, take strong steps now to make that conversion.
Jim Sobeck is a Greenville-based serial entrepreneur. He most recently was CEO of New South Construction Supply, a distributor of building products he grew from 4 locations to 11 locations before selling it in February of 2023. He is also the author of “The Real Business 101: Lessons From the Trenches,” available on Amazon. He can be reached at jrsobeck@gmail.com.
