Like the mountaineer in Touching The Void who cheated death by going down, not up, the glacier he’d fallen into, an SME co-founder discovered that buying more of a business she originally wanted out of delivered a financial escape. Mark Story explains.
To Sydney-based, thirty-something solo mum Chantelle Phinney (not her real name), the thought of acquiring more of the small/medium enterprise (SME) she was trying to exit was a counter-intuitive risk she’d never contemplated.
By all accounts the marketing agency she’d established five years earlier with two other partners was ticking along nicely. But as she was the sole driving force behind its future success, Phinney found she was spending progressively less time with her eight-year-old son, Jacob. When it got to the point where she could no longer guarantee being home on time for dinner, Phinney concluded that the only sane option was to hit the eject button and bail out of the business.
Phinney planned to use the proceeds from the sale of her 33 per cent share to help buy a family home, free up some funds for planned travel, and allocate the remainder to future retirement. As well as helping to service a mortgage and maintain her family’s lifestyle, she thought that taking a high-paying corporate job would give her the desired flexibility to spend more time with Jacob – and possibly fund a private education.
Flawed logic
On the strength of a friend’s referral, Phinney knocked on the door of professional planner Vanessa Woodley, looking for advice on how to invest the proceeds if she sold her stake in the business. After reviewing Phinney’s financial situation, in light of her future aspirations, Woodley concluded that much of the rationale behind Phinney’s planned sell-down was fundamentally flawed.
“It’s the professional planner’s job to help clients achieve stated outcomes,” says Woodley. “But all too often they forget that they’re also directly responsible for helping clients unearth the goals they hold most dearly – be they financial or otherwise.”
Not negotiable
Faced with the reality that she had only a few short years to enjoy the remainder of her son’s childhood, Phinney decided that being there when Jacob needed her most was simply not negotiable. Unearthing this priority provided the right foundation on which to base all other financial decisions, Woodley says.
With little in the way of savings, beyond a modest ($35,000) in a super fund from a former employer, Phinney concluded that the quickest way to fund a sizeable deposit on a property purchase was to unleash the value in the business she’d worked tirelessly to establish.
But after further discussion with Woodley, Phinney admitted that her plan to use the proceeds from the business sell-down to buy a home was more of an added bonus than the main reason for exiting.
“Given my modest earnings – relative to the effort I was making – I thought I’d be better off realising whatever equity I had in the business, taking a high-paying, nine-to-five job and being home on time for dinner,” says Phinney.
“Being solely responsible for 100 per cent of the company’s earnings for only 33 per cent of the returns was a point of irreconcilable conflict.”
Better option
While exiting the business was clearly one option, Woodley says it quickly became clear that there was a better one. Receiving a nice payout and taking a job in the corporate world may have delivered a short-term cash injection, she says, but it didn’t maximise the monetary and non-financial upside over the longer haul.
“I concluded that selling out at this juncture would have severely limited Chantelle’s long-term wealth creation,” says Woodley. “I also doubted whether a PAYE job would have generated the $123,000 Chantelle thought she needed to service her lifestyle commitments, and an $800,000 mortgage – while securing her long-term retirement needs.”
Given that Phinney was the sole driver of the business, Woodley recommended that she seriously consider consolidating, rather than selling down, her stake in the business, thereby reaping a greater share of the rewards. Following more detailed modelling, Phinney was also convinced that her future earnings from this rapidly expanding business would far outweigh a salaried position.
“I now have the opportunity to maximise the future national and global potential before finally exiting this business,” says Phinney.
In addition to raising future job security issues, Phinney also concluded that her assumptions about a senior corporate role offering greater flexibility were slightly unrealistic. With valuations on SMEs severely reduced following the GFC, Woodley suggested it was time to be a buyer, rather than a seller.
Indeed, having so much of Phinney’s wealth tied up in this business did fly in the face of conventional wisdom. But based on untapped growth opportunities, Woodley convinced Phinney that buying more of the business was an educated risk well worth taking.
“Vanessa made me realise that the future growth potential far outweighed the downside risks confronting the business,” says Phinney.
Unfinished business
Phinney subsequently bought out one of the other two business partners who – while also owning a 33 per cent share – had neither the willingness nor the capacity to help bring in new business. In addition to facilitating the necessary buy-sell agreements and maximising small business concessions, Woodley also ensured that the necessary insurance covers were in place to minimise outstanding risks to Phinney and her remaining partner.
