I have friends who have successful companies, consulting or service businesses, which are doing quite nicely.  Some of them are growing well over time.  Others are staying around the same revenue level year after year.

 

Not all businesses are what we might really call companies.  When we look underneath the surface, it could be really be a high paying job.

 

Now there is nothing wrong with that.  There can be a lot to be thankful for a business that generates steady revenues year after year and brings a nice income to the owner.  Not many people get to that point.

The challenge is when a business is intended to be a real company that could be later sold, but is effectively being run as a high paying job for the owner.  It doesn't just apply to consulting or service businesses.  It could affect companies that handle products as well. 

 

I saw one situation just like that.  It was a company that distributed products it designed that were manufactured by others for them.  Sales had grown some over the years, but the bottom line was rather modest.  Some of the private minority investors had concerns that the company was falling far short of its potential, while the president was taking out a nice salary, not extravagant, but perhaps more than the situation dictated. 

 

When starting a business, that is a key objective to consider.  What is the long range goal?  Is it to really build a business or is it to bring home a nice return to the owner.  That can help drive decisions such as:

 

*         Whether money is kept in the company or paid out to the owner in salary and other benefits.

*         How the management team is built up.

*         Whether to bring in outside money and build up the company more aggressively.

 

As an investor, use that as a reality check in any business you are looking to put money into.  As an owner, ask this question to decide what your real long term objective is.