Selling your business? What’s your Freedom Point?
What is the next chapter of your life going to look like?
When asked about using borrowed money to buy stocks, Warren Buffett replied: “It is insane to risk what you have and need for something you don’t really need… You will not be way happier if you double your net worth.”
John Warrilow picked up this quote in a recent online seminar when he explained the “Freedom Point.” He asked the audience of business owners: “Which of the following best represents someone who is wealthy?”
- $10 million in investments assets
- Enough money to cover your lifestyle expenses for life
- Enough money to do whatever you want, whenever you want.
The poll results were as follows:
What is meant by Freedom Point?
He defines the Freedom Point as “When the sale of your business would generate enough cash to do whatever, whenever.”
So, once you have passed the Freedom Point why are you continuing to remain in business?
For example, Shawn Oshman, achieved his goal by the sale of his business, iSupportU, a Colorado-based IT support business. Oshman started the business at the age of 32 and knew he wanted to sell before his 40th birthday. As that milestone approached, Oshman started getting his business ready to sell.
He started by focusing on selling recurring revenue services, like antivirus software, which offered their partners an annuity stream of revenue. Next, Oshman hired someone as head of business development to replace himself as the rainmaker. Finally, Oshman started to take one out of every six weeks off to see how the business would run when he was not in the office.
Since the business was running well without him, Oshman started marketing it for sale and, within three months, he had five solid offers. Oshman agreed to sell to one buyer with whom he felt a cultural fit.
He sold his business for 2-3 times earnings. If he wished, he could have received more if he had stayed on. For Shaun, it was about being on a yacht, not about value.
Listen to his story on Built to Sell Radio.
So, how do you work out your Freedom Point? It has to do with financial independence, the value off your investments both inside and outside your business. Let me explain in simple terms:
- Say you desire a gross income after you leave your business of £50,000.
- Given a 3% return on your funds this would require a fund of £1.65mn or 33 times.
- Say income earning funds outside your business and excluding your main residence amount to £400k
- The gap to reach your Freedom Point is £1.25mn
- Accounting for selling costs of sale and taxation say 15%, the value of your business needs to be £1.47mn.
At this point I must stop since I am not qualified to give further advice. If you need further details on your own circumstances, then you must speak to your wealth adviser.
What do you do when you reach your Freedom Point?
Once it is reached, you are risking something you value for something you do not. We do not know what is around the corner – the 2008/09 financial crash, 7/7 and 9/11 were all noteworthy events. We are here again post Brexit, COVID and Ukraine. What next will impact on inflation, pay, job vacancies, immigration and trade.
So, why hold on when you have reached your Freedom Point?
In my experience few businesses are sold in a few weeks. The quickest I have achieved is three months from marketing to completion, even then the owner had to stay on after completion. It is not like selling a car where the keys are handed over. For a business sale the process is generally much longer. You may have to stay on to receive all the proceeds (In the US the period is on average three years). For private equity sales the period may be longer.
John Warrilow says one of the common comments in his interviews on Built to Sell Radio is “I wish I had done it sooner.”
For example, Rand Fishkin learned the lesson: “You’ll never know the ideal time to sell your company — but in many cases, it’s when someone’s willing to buy it.” He learned this lesson the hard way when his company Moz received a $25 million dollar offer from HubSpot despite only expecting to do around $8 million in sales that year. HubSpot was offering three times forward revenue for Moz and Fishkin thought four times revenue would have been more reasonable. HubSpot’s bid included some cash and a substantial proportion of their stock. With strong conviction that his company was worth more, Fishkin declined the offer.
HubSpot shares would go on to grow in value more than tenfold, while Fishkin struggled to manage his company after an $18 million injection of venture capital. Fishkin grappled with depression and ended up stepping down from Moz. During our interview, Fishkin reveals that today, his liquid net worth is around $800,000 – hugely different from the roughly $200 million he stood to gain had he accepted HubSpot’s offer.
Listen to his story on Built to Sell Radio.
As entrepreneurs, we are optimistic, we have to be to survive. I come across owners who are risking their Freedom Point. They remain in their business even though there is enough money to do whatever, whenever even without realising the value of their business. There is no plan on how to liquidate the value. Their belief is that tomorrow is better than today. Tomorrow could be a long way into the future.
Some owners I speak to fear the loss of their identity. I appreciate the dilemma. The decision to sell your business is an emotional one not purely commercial. One of the most important things you can do to ensure a success has less to do with how much you will receive, but more to do with your reasons for wanting to sell in the first place.
So, how ready are you? Here are ten questions you might like to consider answering.
It is not an easy decision. I know for myself. Please though do not fall into the trap of “doing nothing.” If you want to leave, there is always the option of building a business that could be sold even if you do not wish to do this. If you have reached your Freedom Point without including the value of your business this has to be an answer where you do not wish to leave. The plan needs to be about independence (a) as to how you build a business independent of you, while becoming financially independent from the business.
I trust these tips have provided you with:
- A greater appreciation of the need to consider what your life’s next chapter looks like;
- Determining when you should sell your business and if the proceeds will fund your next adventure; and
- A starting point to address these challenges
Do you require further help with your plan to transition from your business?
More reading, help and advice from Assynt Corporate Finance
Below you'll find links to other articles that offer help and advice about selling your business, what to look for, considerations and recommendations.
If you would like further help, contact us, we'd be only to happy to discuss your sale and can help if we can.