Present value cash flow and long term business value creation are often at strongest odds when it comes to entrepreneurs and small business owners.
There is a need to make a solid and decent living from the business, while at the same time smart small business owners know that they need an exit. To have a successful exit (e.g. selling their company or passing it down to future generations or employees) small business owners must have a ‘saleable’ business.
Unfortunately, building a “saleable” business means making the decisions and choices along the way that lead to long-term value creation (branding, systems, processes) and making the business able to function independent of its owner is the key variable here - this necessarily impedes the money the owner can take out of the business in the short-term.
In order to build a saleable business, the small business owner must not rob the business of the re-investment of cash necessary to build sustainability. Few small business get over this hurdle.
In his famous book: The E-myth, author Michael Gerber captures this issue quite saliently. I highly recommend reading this book if you want to know more about overcoming the business sustainability and saleability hurdle.
Many a small business owner is faced with decisions such as: “I can invest $5,000 into a new marketing campaign or little Johnny can get braces.”
Thus, we are faced with one of the biggest quandaries for small business owners. Present vs. Future.
The most successful small business are those where the owners are in “nothing to lose” scenarios. For example, the young factory worker who decides he wants to start a business, moves in with his parents, saves his paycheck, buys and small pizza franchise, works 70 hours per week , reinvests nearly all the profit for the first few years to pay down debt and develop a name brand and then, bang! Five years later the now slightly older former factory owner owns two pizza franchises netting him $200,000 per year and build a net worth of over $1,000,000.
Main principle: those with nothing to lose are more difficult to defeat than those who have something to lose.
Plain and simple, if you have nothing to lose you will take more risks and have asymmetries of motivation that yield an edge.
The ‘nothing to lose attitude’ is paramount to success as an entrepreneur.
For illustration of this point, read on…
I once had a job as a bouncer at one of largest bars in my home state of Wisconsin. We would routinely have 300-400 people in on a Friday or Saturday night. When you throw a couple hundred gallons of alcohol consumption in, this made for a rowdy crowd.
Being the young “tough guy” that I was , I had the idea that any drunk bar patron who looked at me cross-eyed was going to get an arm-bar and an express ticket to the back-alley.
After a few tussles in my first few weeks on the job, one of the restaurant managers, Jim, came up to me one night and pulled me off to the side.
“Adam, you are doing a decent job here. John (bar manager) likes you, I like you, the bartenders like you. But, I want to warn you about something.”
He put his arm around me and walked me to the back of the bar and continued.
“One day you are going to get rough with the wrong person. There are people out there that you just don’t know about. They can and will do anything. For instance, take a look at that guy over there,” he pointed a rough looking middle aged guy sitting at a high table having a beer, “I saw that guy in a fight here a few years back. He got hit so hard his eyeball popped out of the socket. He still kept swinging and put the other guy into intensive care. Unless you are willing to have your eyeball knocked out, or worse, don’t mess with him.”
Of course, I ended up NOT messing with the eye-ball guy. However, I DID take a very important lesson from that night that I am reminded of often, particularly as I survey the competitive landscape in my real estate and consulting businesses: “those with nothing to lose are tough to beat.”
This also reminds me of a scene in one of my favorite movies: American Beauty. In the scene, Lestor Burnham (main character) is in a meeting with a guy his company has hired to help with downsizing. After Lestor shrewdly blackmails the hatchet-man for $50,000 + benefits, the guy makes the comment that Lestor is “one twisted f#@&,” to which Lestor responds: “Nope. I’m just an ordinary guy with nothing to lose.” Thus begins Lestors empowering journey through his self-indulgent mid-life crisis.
The ‘nothing to lose’ mindset is, indeed, tough to beat.
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