Keeping It In the Business: The Benefits of Deferred Gratification

It’s Friday afternoon, and you’ve been dreading this moment for a few days. Your business has been humming along pretty well lately, but you’ve had your ups and downs. You have a sixth sense about these things and you’ve sensed a change in the market. You’ve seen a decline in new business activity and historically, this has signaled the start of a difficult period for your company.

At the same time, your lifestyle has always kept up with (and sometimes surpassed) your business successes. You’re heading out of town for another scuba trip in the Caribbean. You’ve hired a private guide and you’re taking five buddies with you, all expenses paid.

So what’s to dread about such an amazing experience? It’s the painful eye roll from your controller. Every time you come to her office to withdraw money from the company at an odd time, you can see the pain in her face. She knows it’s going to increase her stress and force her to make some hard decisions. You dread the shame of this request, but you committed to this trip months ago so it must be done.

If this story sounds familiar, you’re probably in a cash-poor business, as opposed to a cash-rich one. While owners of cash-rich businesses tend to place a limited financial burden on their companies, enabling strategic operations, strong vendor and customer relationships, and plenty of negotiation options, owners of cash-poor businesses tend to place a heavy financial burden on their companies, forcing expedient and shortsighted decision making that often creates rifts with customers, vendors, and employees.

The cash-rich/poor dichotomy can become stark in the case of selling your business.

If you’re feeling the sting of embarrassment as you realize you might have found yourself on the cash-poor side of the dichotomy, let me stop you and tell you that, “You are not alone. And you can absolutely turn things around.”

How To Shift From A Cash-Poor to a Cash-Rich Business

To move from cash-poor to cash-rich, our job is to increase your margin of safety, building momentum until you are back in the driver’s seat.

Margin of Safety

Benjamin Graham, the father of value investing, popularized the concept of “margin of safety”. In simple terms, margin of safety means planning for human error, bad luck, and unforeseen events. With a margin of safety, a few disruptions to your plan won’t sink you.

“The Function of the margin of safety is, in essence, that of rendering unnecessary an accurate estimate of the future.” - Benjamin Graham

When applied to a privately held business, one way to determine your margin of safety is to ask: Does everything in my business plan need to go perfectly to avoid financial problems? Or do I have the resources to withstand some bumps in the road? Cash-rich businesses are able to answer “yes” to these questions.

How a Margin of Safety Leads to Strategic Opportunity

When you run your business with a margin of safety, it leads to opportunity. When times are good, you might feel like you’re playing it safe, but when times are bad you’ll be able to make the right moves. Benjamin Graham disciple, Warren Buffett, made his best investments during chaotic times. With a margin of safety, you can seize opportunity when others cannot.

“On the margin of safety, which means, don't try and drive a 9,800-pound truck over a bridge that says it's, you know, capacity: 10,000 pounds. But go down the road a little bit and find one that says, capacity: 15,000 pounds.” - Warren Buffett

How a Margin of Safety Helps Create More Value In Your Business

When it comes to the process of selling your business, margin of safety is critical. For one thing, most business sales are involuntary. Sometimes, this is due to general business conditions, but it can also be due to company-specific factors. Additionally, a margin of safety gives you the leverage to walk away from the negotiating table. With a margin of safety to fall back on, you don’t need the deal, which makes you less likely to accept a bad deal.

Recommended Read: Selling Your Business in the Next 5 Years? Consider These 3 Tips For A Successful Exit.

Are you looking to run your business more strategically?

Do you want your business to be more valuable when it’s time to sell? Are you thinking about selling your business but don’t know where to start? Doescher Group works with business owners determined to exit on their own terms. Reach out to us if you’d like to learn more about how to position your business best for success whether that’s now, or in the future, it’s never too early to know your options.