Many of the financial mistakes that dealers in the alarm industry make can be summarized under the umbrella of the “Enron Mistake,” or for those of us who have been around a little longer, “putting all your eggs in one basket.” One of the basic rules I advise my clients about is diversifying their assets. Don’t try to time the market looking for that big winner. It’s too risky.
A typical illustration is one of the first dealers I met when I began working in this industry. Let’s call him Jim. He was an intelligent individual with a quick wit and terrific technical knowledge. He started in this business right out of high school, working as an installation technician for a dealer in his hometown. As he moved up the ladder to installation manager, he realized he could do a better job at lower cost and deliver higher value to his customers than any of his competitors.
When the opportunity came and the owner retired, he purchased the business. He made some mistakes early on (such as not having up-to-date signed contracts with his customers when he bought the business), but because of his outgoing personality, he was able to recover and move on. He spent years building the business through hard work and because it spun off good cash flow, he reinvested all his free cash back into it. The business thrived. He made a good living and was able to take care of himself and his family very well.
As time went on, he began to consider retirement. He had heard about those “unbelievable multiples” that buyers were paying for a business of this caliber. When he decided to pull the trigger, unfortunately he found that the potential buyers with cash were offering much less than he had anticipated. Those competitors in his area who would pay more, needed him to offer “seller financing.” It was not very attractive for him to have his money in a business with a new owner, and little or no control in its running. This was not what he had in mind for retirement.
Fortunately for Jim, he had some time and was not forced to sell his business in the short term.
After discussing his retirement needs, he decided on a strategy of keeping the business for an additional five years. During those five years, he focused on saving every bit of free cash flow and putting it into a retirement portfolio of investment assets. He set up an SEP-IRA (Simplified Employee Pension IRA), a low-cost, easy-to-administer retirement plan for self-employed individuals, partnerships, and small S or C corporations. This allowed him to make discretionary contributions up to 25 percent of compensation ($44,000 maximum) in a tax-deferred account. He and his financial advisor then developed a model portfolio, which balanced his risk profile with his projected needs during retirement using low-cost index mutual funds to diversify his risk.
In addition, he hired a manager (a chief operating officer) to run the business on a daily basis â€” one who had an interest in ultimately buying the business in several years. He spent his time working “on the business” rather than “in the business,” that is, making it into a turnkey franchise type of operation.
After the five years, Jim was able to sell his business to his COO, with the backing of additional equity investors, for more than he originally expected. He decided to leave some of his equity in the business because he knew the capabilities of his manager and was comfortable with that investment. He took the money he had been investing over the five years and, combined with the cash proceeds from the sale, built on his diversified investment portfolio, which continues to provide him and his wife with a comfortable and successful retirement.
The lesson is the same as for any entrepreneur: As you build your business, design a turnkey operation to increase its value, think about your exit strategy, and regularly take money off the table to diversify your holdings.