Is Your Business a Temple or a Tent?

The Jimmy Buffett song, “Fruitcakes” (1994) contains the following lyrics,  “you treat your body like a temple, I treat mine like a tent”. Similarly, I have seen owners of lower middle market companies treat their companies either as just a way to provide a comfortable lifestyle (“tent”) or as an investment to be developed into a highly valuable asset (“temple”).

According to Ken Sanginario, Founder of Corporate Value Metrics LLC, 250,000 U.S. lower middle market companies will try to exit by 2030, but only 50,000 will be deemed “market ready”. Of those companies, only 30,000 will actually transact and only 14,000 of those will sell at the desired value (6% of the companies trying to exit). These are high stakes for the owners of lower middle market companies since the business usually represents all or substantially all of the their net worth!

Some owners operate their companies as a “lifestyle” business, satisfied with earning a nice living and managing based on how much cash is in the bank at any given time. They are not too concerned with working on the areas that lead to increased company value, such as increasing sales & diversification, improving processes & efficiencies and developing a strong senior management team. When it comes time to exit the business, this owner is baffled as to why they are not part of the 6% that exit at a desired value.

A good lifestyle is certainly a goal for every business owner, but the real pay day to compensate for all of the successes and failures experienced over the years, as well as the huge amounts of financial risks taken, should come at the time of exit. The steps to a successful exit usually begin years before the event by constantly keeping the end in mind and working toward making the investment grow in value. After all, the stakes are high.

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