Take a look at the chart of some sample industries and the multipliers on asset value (business). If you can get net income or profit to $100K in a business like plumbing, you can sell the business for $450K. Every thousand of profit increases the sales price by 4.5x.
You can try and hunt for such returns by finding a better stock at 8%, however, you can’t beat a business profit of 56 times that rate.
Or put your money in a piece of real estate. But finding multiples on asset value would be a rare homerun. You might eke out 15%, and miss out on 30 times the opportunity.
Paper assets, real estate and businesses are holders of value that have different scales of return that the market will bear.
And if you want to exit with a business liquidation event then you focus on the variables to increase the asset value:
- Operational efficiency and cost savings
- Expanded paying customers
- Product pricing
- Top line revenue
- Cash flow predictability
The strategy is to maximize the value of your business asset.
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Of course, picking an industry that has a conventional return impacts your exit as well. Picking well creates a built-in multiplier effect with leverage.
Ultimately, strategy around leverage is the key component here when it comes to driving an exit that makes sense and the built-in variables govern your maximum upsides and opportunity.
Some leverage strategies to think about in the game you have chosen to play:
- How much upside are you able to capitalize on?
- How leveraged is the nature of the industry norms on value?
- Where can you impact value the most?
If you are in a low leverage, low upside, small impact game (like employment or mutual funds), time will pass and you don’t have a shot converting your energy and time to something major.
If you’re going to have to work anyways, what about thinking a bit more strategically about what game you are in and what the end game looks like?