How Much Money Do You Need to Walk Away From It All?
During a casual road trip with TruMethods CEO Gary Pica, we stumbled onto the conversation of MSP valuations and retirement. Admittedly, most owners plan to retain their IT services businesses for the long haul. But the vast majority of short- and long-term owners have a common problem…
And it goes something like this: Owners are seriously underestimating the amount of money they’ll need to walk away from their business.
The evidence? Pica has quietly asked dozens of MSPs how much money they’ll need to walk away from it all. I often have a similar conversation with ChannelE2E’s readers during private discussions. Quite often, Pica and I hear a disconnect that goes something like this.
- The business owner thinks the company is work $X. But in reality, it’s worth far less than $X.
- The business owner thinks he or she needs $Y to walk away from it all and live happily ever after. In reality, the business owner needs at least twice the $Y figure to really walk away.
Bridging a Massive Gap
Re-read those two bullet points. And it shows a gaping chasm between (A) what owners think they’re businesses are worth and (B) what owners think they’ll need to retire. Basically, owners need a reset on both fronts.
- First, figure out how to increase the value of your business. In the TruMethods world, that involves Picanomics. But in a broader sense, it all comes down to raising your EBITDA, year over year, in a consistent way.
- Second, owners need to figure out what they truly need to exit. To live happily ever after.
Here’s an eye-opening statistic: Only 35 percent of business owners with $10 million to $250 million in revenue are “very confident in their personal wealth management strategy’s ability to meet their financial and life goals if they were to stop running the business today,” according to Merrill Lynch.
What does that mean for the thousands of IT service provider owners that generate $9 million or less in annual revenues. If the big guys ($10 million to $250 million) are feeling lost, the smaller businesses — the bulk of the market — must feel overwhelmed.
Or not. As the old cliche goes, most IT service providers are working in their business rather than on their business and personal financial plans.
My advice? In addition to working with a peer group, sit down with a wealth management planner (here’s a top 100 list, though we’re not making specific endorsements). Even if you don’t have “wealth” to manage just yet, you can be creating wealth — in your business — every day.
Consider this warning: On average, 80 percent of an entrepreneur’s wealth is tied up in his or her business, according to Walk Away Wealthy (required reading for small business owners, by the way). And 75 percent of those owners don’t know the value of their businesses.
Start doing the math. Then, close the gap between the business’s value and the figure you’ll eventually need to walk away from it all…