Are you building your consulting firm for lifestyle or sale?

bike croppedYou will have your own story as to why you set up your own business and the approach you have to running it. In our experience, the motivating factor for building your firm will fall into one of two categories: lifestyle or sale.

If your firm has become a lifestyle business, you enjoy what you are doing, and are balancing personal life with income generation, then it may make sense to carry on doing what you’re doing. The only question we would ask is, are you putting enough away from your earnings each year to fund your retirement, so that when the day comes when you can’t or don’t want to continue you’ve achieved financial security? Consulting is a young person’s game, it’s exhausting and you’re not going to do it forever. At some stage you’ll get off the wheel – will you have the means to do so?

There are also a lot of people who run a lifestyle consulting business because they’ve never considered the possibility of selling it. They think that a people business can’t have any value. On the surface, it’s an understandable misconception: all of the assets of the business have got legs.

There are a lot of people who would view a consulting business with the sort of partnership mentality found in accountancy or law, where the name of the game is to extract as much cash from the business on an annual basis as possible and not worry about the end game. However there are two reasons why that may not be the most lucrative approach.

The first is that every time you extract money from a company; no matter how clever you are at getting it out you pay tax, either as income tax or tax on dividends.  So the idea of extracting money each year and putting something away is fine, but it’s not the most tax efficient.

The other reason is that you can ‘have your cake and eat it’ because there’s nothing to stop you extracting as much cash as you want each year and at the same time building a business that’s got some equity value that you can realise at the end of a certain period of time. The ideal scenario is that you just keep enough cash in the business to be able to achieve your growth objectives.

One of the great things about a consulting firm is that it doesn’t consume that much cash to grow, you’re not investing in capital equipment or buildings and things like that, you are in essence just managing the gap between when you get paid by clients and when you have to pay staff salaries. If you’re really clever that gap can be zero. You will need to leave some in for additional sales and marketing, product development and things like that to fund your growth, but you shouldn’t have to leave too much in there. If you do the right things, you’re going to have a business that’s worth something.

It’s rather like saying to somebody: you can spend the next five years working with clients and doing great stuff and taking a good salary, or do exactly the same thing and build up a pension scheme at the end.

So it’s a choice, you can build something of real value that you can sell onto somebody else or just walk away with nothing.

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