This is part of an ongoing series about how to build wealth. To receive the rest of the posts in this series, go to paparelli.com and subscribe.
If there is a recipe for wealth-building that I’ve observed to be most successful over the years, it can be best summarized with these five steps.
Five Steps to Wealth Building
Step 1: Build a long-term business which provides cashflow and increases in value each year.
Step 2: With the excess cash, invest in or start other businesses which produce cash and grow in value.
Step 3: Sell these businesses to other investors or companies who approach you and who want to buy them.
Step 4: Build your credibility with increased market exposure and public relations. People must conclude you are successful.
Step 5: Raise money from wealthy people who want to invest in you and your investment thesis. This will allow you to increase your personal cashflow, take ownership of bigger deals, and realize higher dollar returns with far less personal risk.
“There are companies all over Atlanta who could have sold but didn’t,” said Howard Morrison.
Howard was a good friend to all of us in the Atlanta tech community in the late eighties and early nineties. I called Howard the ombudsman for C&S Bank. He knew everyone, and he encouraged everyone. He was also an angel investor…one of the very first in Atlanta.
He continued, “I have seen many of our tech companies pass on good, solid, real offers. Looking back, it was clear to me these buyers showed interest when the company’s star was on the rise. After passing on the offer, every company lost value and never got it back.”
He shared this observation 27 years ago, and I can hear him saying this to me like it was yesterday. I remember the building, the lobby, the stale air in his downtown office, the suit he was wearing, and the time of day. I never forgot what he said. When I heard it, I knew it was true.
But did I learn from this observation? Nope.
In 1998, I was six years into the development of what was my cashflow business. I was determined, as was the founder/CEO, to not sell the company. We were going to own it forever and enjoy the cashflow and continuing increase in value.
That’s when an F100 company came knocking on our door.
We had built a service company. Traditionally this type of service company was valued at .4-.8 times revenue. But in 1999 with the Year 2000 threat on the horizon, these companies were selling for 1.5-2.5 times revenue. The company had revenue of $7.5mm. This F100 company was looking to buy us. In fact, we fit perfectly into one of their service strategies.
We passed on the offer. Three years later we shuttered the company. We went from a market value of potentially $15mm to zero in nothing flat.
I learned a business lesson the hard way which Howard Morrison tried to teach me the easy way. There is a time to start a business, and there is a time to sell a business. And when someone is interested in buying your business, when they approach you and have real money, there is no better time to sell. This is when you will get the greatest value from the company you started and built.
The company may very well be worth more money at some time in the future. But if you hold out, the odds are stacked against you. The reason? The issue is you. You are probably not the leader to take the company to the next level. You’ve run the course. Now take your money, and leave the future to the pros.
By not selling to the potential buyer, we lost the cash flow and the value. All in one fell swoop.
But there’s a happy ending to this story. There was another company which was created from that service company’s ashes. It took ten years, but the new company was built from scratch by a great leadership team. It once again provided significant cashflow. But the leadership team was ready to realize their share of the company’s value and move on. We sold the company, and it was a great success for all involved.
The value of the company was exchanged for cash. The cash became liquid net worth for all involved. Houses were bought, retirement plans funded, and more new companies started. A truly happy ending.