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The Evolution from Creating to Investing in Small Business

Walking away from a business you’ve poured your heart and soul into is a difficult decision, but if you’ve taken the time to develop a rewarding exit strategy, a new set of opportunities undoubtedly await you.

At the beginning, these opportunities may involve pursuing a post-exit “bucket list” of sorts, all of which speak to both your personal interests and the goals you’d only dreamed about when you were working long hours inside your business. From traveling and purchasing a new home to spending more time with loved ones, there are plenty of meaningful options available to you as a small business owner after leaving your company in the hands of a capable successor.

At times, however, little planning is done for life after business, as Joan Crain of BNY Mellon Wealth Management pointed out in an episode of our radio show The Second Stage titled From Entrepreneur to Investor, saying:

Building a small business requires a lot of focus, a lot of dedication, and typically there’s not a lot of attention paid to, “What am I going to do? What’s my life going to be like when I no longer run this business?”

Small Business InvestorIt’s been our experience that the panacea for many entrepreneurs usually takes place within a few months or years after an entrepreneur leaves an organization, where a desire to rejoin the fray of entrepreneurship to some degree is reawakened. This could consist of creating a new startup or changing your mindset from entrepreneur to small business investor.

Venture capitalism is characteristically part of every entrepreneur’s DNA makeup, which makes the evolution from business owner to business investor a seemingly natural transition. But as we discussed with Ms. Crain on our radio show, both exiting the business and stepping into the role of investor should absolutely be executed in a measured, sensible manner.

In spite of that, the differences between the role of the entrepreneur and that of an investor is complicated at the outset for many former business owners, as Joan Crain noted in her white paper on how to successfully navigate the transition between the two:

Most successful business owners are successful because they have dedicated themselves almost entirely to running their business. The owner knows where every asset is, intuitively understands the cash flow patterns, and can almost predict the profit and loss. She or he turns the lights on every morning and can feel and touch the business’ assets. A big part of the transition for a business owner is leaving this comfort zone in order to attend to the details of divesting the business and shifting to new investments for the future. This usually means moving from active control of all investments to being a passive investor, and that often does not sit well with individuals who have built and controlled an enterprise. One difficulty is the inability to “see” the assets in an investment portfolio. The investor of course knows what investments are owned, but doesn’t have great vision into those assets.

The answer, as she points out, is to have a wealth manager on board who deeply understands your needs and concerns as an investor rather than an entrepreneur, then creating an investment plan that caters to these areas.

As an entrepreneur, you feed from the optimism of being successful in your small business despite being aware of the danger and challenges that will inevitably reveal themselves. Your vision becomes your buoy, and you know how to make the most of your resources to reach the goals of your organization.

As an investor, however, this optimism tends to take a back seat to making wise investments based on your own due diligence, and should always include a shared final decision between you and a skilled financial advisor.

Where your optimism went largely uninformed as an entrepreneur, and gut feelings sometimes made more sense than academic business decisions, being an investor necessarily entails knowing exactly what your capital will be used for, as well as how it will be spent. As much as you might believe in a company’s product or service, every dollar you worked for so diligently needs a serviceable strategy and well-established business practices guiding its dispersal.

To learn more about what we at Evolution Capital Partners can do for those who are looking to invest in a small business, reach out to us directly through our website, or via our social channels on LinkedIn, Twitter and Facebook. You can also get more information on our investment methodology by viewing our infographic on The Five Pillars of Business FreedomSM.

Posted by: Jeffrey Kadlic A co-founder and managing partner at Evolution, Jeffrey has spent the past 15 years as an investor and private equity professional with a true passion for working with dynamic small businesses. @kadlic

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