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The Paradox That Blocks Escape From Corporate Prison

“I’m tired of my corporate job at ______, I want to be an entrepreneur, be my own boss, how do I buy a business?I get this question about once a week. The ensuing conversation often feels more like a counseling session than a business conversation. In most cases, the individual doesn’t really want to be an entrepreneur; they are unhappy with their job and just want to fantasize about doing something different.

I know that sounds harsh, but the escape from corporate employment to business ownership is long and windy, and I’ve seen how it usually comes to a screeching halt because of this paradox: the business that fits their parameters does not fit their parameters.

The escapee says they want a business that will replace their current corporate compensation. They usually forget to include the value of their employer’s 401K match and health care cost, so once we’ve done all that math, the escapee now has their target compensation. While expectations vary depending on their age and current income, the average target compensation I hear is around $300,000 per year.

Then I hear, “OK, Jim, find me a business that has cash flow of $300,000.” Though every situation is different, as a general rule, a business with cash flow of $300,000 would sell today for $1.2 million (maybe more, maybe less — but stay with me, I’m trying to make a point). Does the corporate escapee have $1.2 million in his/her bank account? Usually not, so they need to get bank financing to support the deal. How much a bank will finance obviously depends on the strength of the business and amount of collateral the buyer can offer. Normally, a bank will loan slightly more than two times cash flow, or in this case around $700,000. The buyer, therefore, needs to bring around $500,000 cash to the closing table.

So assume the bank loans $700,000 on a seven-year term at a rate of 6%; that’s an annual payment of about $125,000. This means the owner’s actual cash flow will be $175,000 per year. Suddenly, the escapee realizes they will be investing a ton of their own cash yet the business will still not give them near the $300,000 compensation they need. So instead of saying “My family and I can make this work, we’ll tighten our belts,” they will usually say, “this business doesn’t work for me.”

Therein lies the paradox, they say they want a “good opportunity” but when they see it, they don’t want it because the opportunity doesn’t meet their current income expectations. So when I get a question about buying a business, I reply “How much cash can you invest and what’s the least you and your family can live on for five years?”

In most cases, when confronted with the reality of investing a large amount of cash while having to adjust their personal lifestyle to make the numbers work, the escapee suddenly seems ok with their life inside the corporate prison.


JIM CUMBEE is President of Tennessee Valley Group, Inc. a retainer-based business brokerage and transition mediation firm in Franklin, TN. Cumbee is an attorney and has an MBA from Harvard Business School. He has a wide range of corporate and entrepreneurial experiences that make him one of the most sought-after business transition advisors in the state of Tennessee. The names and fact patterns above have been changed to preserve the parties’ identities.

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Tennessee Valley Group

Jim is an attorney (non-resident status with the Missouri Bar) and though he no longer practices law, he has read and negotiated enough legal documents to fill a cargo tanker. He has an MBA from Harvard Business School and knows how Wall Street and private equity operates. Jim is a Tennessee Supreme Court Rule 31 listed general civil mediator with tons of experience helping business owners (large and small) work through sensitive problems to achieve winning results. He is the author of "Home Run, A Pro's Guide to Selling Your Business, Seven Principles to Make Your Company Irresistible."

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