Would You Buy Your Business If It Was For Sale?
Statistics show that on average a small business will change owners every five years or so.
That means the longer you’ve owned your business, the closer you’re likely getting to selling it. Now, for those of you who are reading this and thinking “no way, I’ll never sell my company”…while that may be true – the content of this article is just as important to you if you’re allowing any of the issues we’ll cover to exist in your business.
So, whether you’re going to be selling at some point, or you’re a fifth-generation owner running the family business that you’ll pass on to your kids someday, the strategies outlined here will make you more money until then. The key is to start thinking of your current business in terms of what someone looking to buy your company would see.
Motivation: Let’s start with some business-valuation math.
Small business sales are traditionally priced based on a formula called multiple of earnings. Simplified, it means that a prospective buyer considers what a business makes for its owner each year, and offers an amount usually between 1 and 3 times that value to buy the company. The multiple generally depends on how long the company has been in business, how competitive it is in the current market and how easily a new owner could assume control of the operation.
Goals: What’s it going to take to make this happen?
The first goal in improving the value of your business will be to increase your earnings, which is the first element in the valuation of your company. And, since we can’t change how long you’ve been in business (except by staying in business), the next goal is to improve the competitive positioning of your company in the marketplace. Finally, goal number three will be to transition your business to a model that runs itself with more of your guidance and less of your direct participation wherever possible. Again, those of you that feel like you should stop reading because you’ll “never sell”, hang in here for a few more paragraphs…this is going to make a ton of sense to you as well.
Problems, Challenges, Headaches.
If there is something going on in your company that would concern a potential buyer, chances are it’s taking a big toll on your ownership as well. The fact that you have been able to adapt or “work around” the problem is not a solution, and issues like those generally tend to get worse, not better. And while it’s true that some business improvements cost money, that fact it is that if you wait until you have to fix them, you’ll have much less control over how. Plus, the investment required at that time may eat into profits at the very moment a potential buyer is analyzing your bottom line. By committing to identifying these issues and finding a way to fix them, your business improves both in terms of what your day-to-day looks like, as well as what a potential buyer will see. Not making the commitment to solve them will surely come back to bite you – usually when you least expect it.
Keep Good Records.
The first thing any good business broker will tell you is that a business with excellent record keeping will receive the most interest. And the resulting purchase price ends up much closer to the asking price when they buyer has confidence that the numbers are accurate. So when the time comes to sell, a business with clean books will generally sell in a shorter time for a higher amount. And in fact, poor record keeping is the number-one reason deals fall apart.
Equally as important, keeping thorough and accurate records allows you to have an firm grasp on key metrics in your business like cash flow, inventory turns and profit margins. Without these you’re basically flying blind, leaving yourself unnecessarily exposed to unforeseen circumstances that can seriously impact the future of your company.
Institute Clear, Effective Policies and Procedures.
Your operations manuals, policies and procedures should be explained in such a way that even your most entry-level staff can comprehend, interpret and execute them. If you were to have guiding principles reduced to writing that deal with the most common critical issues that arise in your business, consider the impact that would have when you need to train new employees, expand to another location and promote staff members to new or additional responsibilities. Instead of wasting endless hours getting them up to speed, it’s all right there in black and white.
Similarly, a potential buyer might be concerned that too much of the business may be new to them or that they won’t be able to handle the responsibilities as the new owner. With effective systems, policies and procedures that are covered in sufficient detail in your operations/employee manual, that concern is basically eliminated and the confidence of taking over from you comes easier.
And Lastly, Unpleasant As It Is…The Question Must Be Considered:
What If You Get Hit By A Bus?
Can someone step in right now and run your business if you can’t? If the answer is no, and something unfortunate and unexpected happens to you, what happens to your company? You’ll not only lose your income, but also your clients and business reputation. Also, unless a potential buyer has experience in a similar industry, or it is one of your current employees — they’ll have serious concerns about the transfer of your knowledge and experience. It doesn’t matter how simple your business model is, training a new owner to do everything that you do every day (most of it by reflex) is a huge undertaking. The majority of new owners buy companies in industries that are new to them, and as they dig deeper into your business, they often get unnerved while considering all of the things they don’t know. If you don’t have adequate procedures to show them how to get up to speed quickly and stay there, it’s likely to appear too overwhelming for them and they’ll walk away.
So, if you are “the business”, you’d better start working on your systems, policies and procedures and create a contingency plan or you risk losing it all in a crisis. (In the mean time, please be sure that you always look both ways before you cross the street!)
When all is said and done, if you approach the daily running of your business like you have to sell it tomorrow, you’ll find yourself implementing strategies that will immediately improve key areas of your company — and pay you back in multiples down the road, regardless of whether you ever decide to sell.
For more information or to discuss your particular needs in this area with an
expert business coach, please contact us and schedule a complimentary initial
telephone consultation where we’ll provide a customized
12-point growth plan for your business.
Breakout Consulting, LLC
Dearborn, MI ∙ San Diego, CA