Building Wealth Through Your Business (2/6): Three Mistakes Business Owners Make Building Wealth

As a business owner, you are probably overlooking the fact that over the next five to 10 years, a major set of bad news will happen to your, you or your business, and you may not be ready. And the fact that the more financial resources and options you have, it will better determine how you are resilient and what your path will be forward

It's important to build those options in advance. My name is Cannon Carr, and this is the second episode in our miniseries about common things that many owners overlook when building wealth through their business. And today, we're gonna be focusing [00:01:00] on those common mistakes that I see business owners make in fundamentally building wealth through their business

And today we're gonna focus on the three common fundamental mistakes that I see business owners make when building wealth through their business, and how important the options can be to help create resiliency and a better path forward

The first mistake is not thinking through how you are going to leave your business. I call this transferability, how you are going to ultimately walk away and leave your business operating on its own for a different [00:02:00] owner, and it is an important thing to get right. A lot of owners will say to me "I'll think about that later.

I don't have time today. Uh, we'll deal with this later." And later usually leads to a forced sale not on the terms you want and when you have to do it. And think about it this way, like I said, a major event over the next five to 10 years, you may have a major health issue, you may have a major dispute with a business partner, uh, you may have, uh, your own personal life event that's gonna require a major cash outlay.

Uh, there may be a market shift that changes the competitive dynamics, or you may simply have burnout. I've seen it many times. An owner is exhausted. Uh, a buyer calls with an offer. you know, they're, they're they haven't cleaned up the financials of the business. They don't have a deep ben- bench for leadership.

They haven't really documented how processes work, and they end up giving the buyer m- uh, much leverage in this negotiation, due diligence takes longer, and the [00:03:00] terms get worse. let's build options so that, uh, you uh... Let's build in today how you plan to walk away from your business on your terms so that you aren't left stuck in a corner.

If you want a simple starting point in this area let's ask two questions. The first was, uh, the first one is, what parts of the business totally depend on you today? And the second one is, if you are buying your company, what most scares you in due diligence? And this is the big shift. If you can answer these two questions thoughtfully, you're gonna be seeing the business from a buyer's perspective, and you'll start to be building those terms of what, how you will leave the business in a healthy way.

The second mistake I see owners often make is, is tying their financial future too closely to the business[00:04:00]

I call this putting all your eggs in one basket. I hear owners often say, "My business is my retirement." And sometimes that works, but usually it doesn't. And it doesn't because you have massive wealth that's concentrated in your business, and it's illiquid, and you are counting on a, an event five to 10 years from now, and y- you know, you're, you're depending so much on that, A, that exit value, and B, the cash flows along the way

It surprises many owners, but I say let's build that personal financial independence before you leave the business. Don't bet o- on it just on a successful sale. [00:05:00] If you have independence before the business that brings you those options that are so important. And by independence, I'm not talking about just a cash reserve, a 90-day cash reserve.

I'm talking about those strategic investments that are really for the long term that create what I can often call a freedom asset. It becomes your wealth outside the business. And I'm not saying that your business isn't still the majority of your wealth-creating engine, but I am saying you're creating a strategic asset of wealth separate from the business.

And what forms can this take? Uh, it can be 401s and IRAs, you know, your retirement accounts. It can be a brokerage asset that's a taxable account. Uh, it can be a real estate investment that kicks off income and distribution. there are a lot of different forms, but the point is you're not betting solely on one liquidity [00:06:00] event

The third common mistake I see owners make is that they are ignoring liquidity needs, uh, in the interim three to five years in their business journey. In other words, I call this flexibility for the unexpected. You know, every business, like I said, will face disruption and bad news along the way, and you can't predict it but you do have to plan for it.

And by planning for it and building those options and liquidity will actually he- help you handle when that surprise happens. You can say, "I didn't see it coming, but I was ready." because without liquidity, you can get cornered. Uh, you ... And when you get cornered uh, I talked about earlier, you may have to sell at a discount, or even if you're not selling, you may fund it with stress.

In other words, your nervous system is your line of credit, uh, and you go through incredible stress to make an adjustment, to fix the [00:07:00] business

So building in liquidity, which is those strategic assets that can kick off income, that can, can build those, uh, those cash sources and distributions from the business. By building those liquidity mechanisms, you buy time during bad news. Uh, you don't have to take a bad deal or make a bad decision or make a rush decision.

You buy time, and you're able to fix it in some way. Not that it's not gonna be disruptive, but you'll come out on the other end still intact and still working toward that North Star that we talked about in the first episode of this miniseries

Here's a good test I like to, uh, use, uh, in this to test liquidity. If your revenue drops 15%, what takes the biggest hit? Is it your operating plan or is it your personal plan? Because if it's your personal plan, that means [00:08:00] that you are probably making that mis- one of these three mistakes or all three of these mistakes that we've highlighted about building wealth through your business, and you're gonna need to build, to think, uh, to resolve it, think about how you're going to leave, think about how you're building a strategic asset, and thinking about those sources of liquidity

So as an action step, pick one of the mistakes you think you're most exposed to, recognize it, uh, and then decide how you're going to create options, through to correct that one mistake. And, not options like I'll think about it in the future. Tie it to today. Make that action item today. If you want help pressure testing this idea, send me the word options.

DM me the word options, uh, and I'll share a simple checklist with you to get you started. Thanks for listening to this episode. Our next one is gonna focus on [00:09:00] what I call the three Rs, which are for every dollar that your business generates, it has a very specific implication for your financial decisions on the personal side as well as the business side.