Starting a business can be risky, but unless you invest a significant amount of start-up cash in your venture, you’re not really risking much other than your time.
That changes if you’re lucky enough to get your business off the ground. As your company grows, you risk more of your personal wealth because the business you’ve built is actually worth something. Statistics show as much as 80% of an owner’s net worth is tied up in their business.
The Risk of Personal Investments
As an entrepreneurial couple, we invested our personal wealth into our businesses, which is quite similar to raising children! As children grow, so do your investments of time and money. Many times, we sacrificed ourselves for our children, nurturing them rather than ourselves, covering the costs for their extracurricular activities and personal endeavors. Today, our children have developed into strong, healthy adults with promising futures. We couldn’t be prouder and yet, we admit we are amazed we had anything to do with it!
Similarly, when starting a business that becomes our “other child”, we find ourselves as owners following that same behavior. We would do anything to protect our business, even sacrificing and risking our personal wealth.
However, over time, this way of life enables owners to become more risk averse as their business grows, potentially squelching growth to avoid risking losing what they’ve created (and invested). These behaviors can take the owner from a company’s great asset to its biggest liability.
Let’s go back to that child-rearing analogy. When kids are young, most believe their parents can do no wrong (we are our kids’ greatest asset). But then, almost overnight, parents are no longer the go-to person (we have become a liability). If we aren’t careful, we could unintentionally minimize our children’s growth by tightening control and threatening to stop all funding. As soon as our kids want to soar and explode (on their own), we begin to feel uncomfortable and see this as “too risky”, even though it may be time our kids take on some of this risk. Isn’t it time for us parents to get our lives back and stop shouldering all the responsibility (including debt)? The same type of questions and feelings ring true with our businesses.
Cigar City Brewing
For an example of how growth can impact an owner’s appetite for risk, let’s look at the case of Joey Redner, the founder of Florida-based Cigar City Brewing. Redner’s craft beer operation started in 2009 with a modest goal of selling 5,000 barrels of beer per year.
Cigar City proved popular and Redner was able to sell 1,000 barrels of beer in his first year of business.
Cigar City Brewing continued to grow but was thirsty for cash, eventually forcing Redner to take on a personal SBA loan. Redner quickly surpassed his 5,000-barrel goal. By 2015, the company had scaled 55,000 barrels per year, at which point Redner ran out of capacity in his brewing facility. Sounds great, right?
In order to expand to the next level, Redner would have had to find another $20 million. However, he was tired of feeling “all in” at the poker table. He had built something successful and wanted to enjoy financial security rather than having to roll his winnings into even more debt that he would have to personally guarantee with the bank.
Redner decided to sell even though his business was still growing and he had built a brand Floridians loved.
Limiting the Risks
And therein lies one of the hidden reasons owners decide to sell. They are tired of shouldering all of the risk. Most of us have a limited appetite for risk. As Bob Dylan says, “when you ain’t got nothing, you got nothing to lose.” Start-ups aren’t risking much, but when you build something successful, every day that you decide to keep it is another day you have all (or most) of your chips on the table. No matter how strong your hand, eventually we all decide to cash in.
President of Resultants For Business, Steve Wilcox, is an entrepreneurial owner, Business Advisor, EOS Implementer, and Certified Value Builder Coach. Connect with Steve and other RFB® Business Development Advisors here, or on LinkedIn.