Always Start With The End In Mind
If you’re entering small business, promise me one thing.
Start with the end in mind. Make an exit strategy.
The day that you get your biggest pay in small business is the day you sell the business.
That’s when you utilise your exit strategy.
Other reasons that you might need an exit strategy are because of: illness to yourself, family illness, wanting a change of career, being too tired, not having someone to take over the business, etc.
In 1999, the Aussie government made it a heck of a lot rosier to sell your growing small business. Essentially, if you’ve got less than six million bucks, you’re going be able to sell that business and pay no tax.
One of my clients followed this advice of starting with the end in mind and it worked out very well for them.
They were a couple. The fella was in the building game and worked for high-end builders on big construction building projects. He had his own building license as well, so he was a pretty smart cookie on that side of things. The lady was a high-energy person and had some good experience in the hospitality industry.
They came to me one day and said: Look, Pat, we’re thinking of setting up a coffee shop.
My initial thought was Cafes are hard work. You have to get the lease right. You have to have a fair bit of money right at the start. It’s tough. But they persisted, and did so with my advice.
First of all, they understood the value of what they were trying to build. They knew the value of one cup of coffee and how that would amount to profit if they were selling x amount of coffees per week.
Secondly, they understood the building industry. They found a fantastic corner block so they could put the tables and chairs at the sides of the building. The fella got all of the building permits, knew what they could and couldn’t do, and then they were able to get the permit for the cafe very easily. The lady was absolutely brilliant at interior design and got the right layout for the shop.
Thirdly, they understood that a café has a limited life. They knew they would need an exit strategy to sell the business within a few years because they would get tired. Café’s gradually draw the physical energy out of you, if done properly.
One important tactic that they used was buying the premises. They bought the café property in their self-managed super fund and ran the business through a trading trust, so they had the enormous tax benefits there.
When the business kicked off, it ran really well. The place was humming, and they had it at the point where they were getting really tired. It was at its peak. So they employed their exit strategy and sold the business on the market 3.5 years after it opened.
They got a very good price, but held on to the freehold, to the property, which was in their self-managed super fund.
Suddenly, they had a commercial property which was had a big value increase because of the business running inside it ( hint hint – the commercial value of premises is a function of how much rent is charged to the tenant ) and could earn good rent off the business owner who came in and bought the business off of them. They got out, paid zero tax, and off they went into the sunset.
The key for them was having an exit strategy and starting with the end in mind.
My advice?
That was a real-life example of a real client starting with the end in mind.
When you start a small business, consider what it is going to be worth in three, four, five, six years’ time?
You don’t know what’s going happen in life, so it is vital to be prepared. The tax laws have been set here so you can get a big payday one day and pay zero tax when you sell.
Exit strategy… what’s yours?
Pat Mannix, Partner, Paris Financial