Can You Be Making Too Much Money?

Adam (not his real name) is an easy-going hard charger. Yes, that sounds like an oxymoron, but Adam is the kind of business owner who looks like a duck floating smoothly, but he’s paddling like crazy below the waterline.

He is a second-generation owner, he took over a business his dad started and made it much better. But, the pandemic of 2020 hit Adam very hard. His business was not considered “essential,” so he was basically shut down for about three months.

Since he didn’t know at the time how long the shutdown would last, Adam wasn’t confident he’d make it through. He went into the pandemic with a heavy debt load, the result of some bad decisions his father made a few years ago just before he retired. Having a heavy debt load going into a pandemic is, shall we say, a treacherous confluence of circumstances.

Over a recent lunch, Adam told me how he used that scary time to re-think his business processes. “I was doing many things only because that’s the way we had always done them,” Adam told me. “But being shut down forced me to focus on what was really important to my customers. So when we phased back in during the late summer, we had a business that looked the same to my good customers, but behind the scenes many improvements had been set in place.”

So now, here we are going into the summer of 2021 and Adam has another problem on his hands. He is making too much money! Yes, that’s right, those changes executed a year ago have made so many things better that Adam’s business is way more profitable than it was pre-pandemic!

Adam wanted my advice on what changes he could make now to make his business more sellable in five years when his youngest child finishes college. “I told Margot that once Elise graduated, we’d go on a world cruise. My wife has a way of remembering the promises I made, so I need to be ready,” Adam told me with a big grin on his face.

“Three things you should do with your excess cash,” I told Adam. “Accelerate your debt pay down, invest in annual audits of your financial records, and commit to funding a technology platform that gets you in closer touch with your customers.” The point I was making with Adam was simple: when you are ready to sell, you want to have no debt, perfectly reliable financial data, and as much information on your customers as possible (intimate knowledge of your current customers is key to finding new customers, and buyers love a growth plan).

Can a business actually be making too much money? Well, oddly enough the answer is “yes,” if the owner is not strategically reinvesting excess cash flow toward long-term goals. Adam astutely used a time when he wasn’t making any money to plan for his future. No question about it, he and Margot will someday have a very nice, very long cruise.Ca