- Creation of Wealth for Business Owners
Among the common goals of members of a capitalistic economy is the creation of wealth. This is often a reason why people own businesses. For an individual, the concept of wealth creation is the escape from dependence on earning funds for current expenses to live a certain lifestyle to building up assets and resources that appreciate over time and are of a magnitude to sustain that lifestyle or a better lifestyle without the need to earn funds for current expenses. Creation of wealth is a reference to accomplishing financial independence through the creation of passive income from investments.
There is also the concept of risk involved with the creation of wealth. To be independent from the need to earn income it is ideal not be at risk for the source of that income. Risk cannot be eliminated, and the safety of certain types of passive investments can be debated; however, there is no question that an income source from a business has more risk than an income source from most passive investments. Business risk is significantly more because even over short periods of time the business arena is constantly changing, with markets evolving, management transitioning over time, and other unforeseen changes. A business which is not changing or that is making poor decisions will become unprofitable. This business risk, although variable for each business, will usually be far greater than the risk of carefully making passive investments.
For a business owner, the path to wealth creation is to transfer the value created by the profitable operation of the business from the business to the owner taking that value out of business risk. This enables the creation of wealth through the acquisition of safer passive investments that sustain a desirable lifestyle.
How does the business owner accomplish the transfer of the maximum value possible out of business risk and into personal investments at lower risk? A sale to a buyer outside the business will accomplish the maximum value transfer of value from out of the business to the business owner. The strategy to accomplish a deriving maximum value from a business through a sale to a buyer outside the business is Prior Diligence.
Prior Diligence is the basic strategy for planning to sell the business to a sophisticated buyer who will investigate the business as part of a due diligence process prior to sale. Prior Diligence places the business owner in the view of the prospective buyer and asks, “would I buy this business – if not, why not?” The business owner reviews a diligence checklist and addresses deficiencies of the business accomplishing improvements through Dynamic Planning.
The details of the Prior Diligence strategy and the Dynamic Planning method are described in the substack, Owning A Business, https://rickriebesell.substack.com. By utilizing this strategy and method the business owner can accomplish deriving maximum value from a business and transfer that value to the personal investments of the owner enabling the creation of wealth.