Your end game should always be to grow your company for future profit.
Eight out of 10 businesses do not sell. The biggest mistake that sellers make is that when they are first starting out, they do not plan their exit strategy. Every business owner should always be thinking about the future and the day they plan to sell their business for a profit. The way to do this is to continually work on your business, not in your business. There are millions of Baby Boomers planning to retire, but they will not be able to sell their business for what they need to enter the next chapter of their lives. Many will end up selling for pennies on the dollar, closing their doors or filing for bankruptcy.
Create the highest demand for your business through profits, potential, assets and by making sure your business is automated. The first thing to learn about developing and building a business to sell for optimal value is to know that buyers want to buy a business, not a job. The next thing is to know your numbers and to know your customer-acquisition cost. Maximize leads and prospects through good marketing and networking techniques. Make sure it is easy to calculate your conversion rate in sales, and make sure all possible revenue streams within your business are properly estimated and fluid. The last is to minimize your expenses — that’s a no-brainer right there though, right?
I often have business owners who comment that their business possesses a lot of potential. That’s essential in the building process, but let me just tell you that people looking to buy do not pay for potential. Potential matters, but it is vastly overvalued by sellers. Most buyers pay for performance, not potential. Even the few buyers that pay for potential rarely pay much. What people will pay for is assets, such as real estate, equipment, intellectual property, databases, software and hardware, etc.
Sellers who attempt to sell their own business have about a 60 percent failure rate, as do many business brokers. In my business brokerage firm, one of the first things we do is identify who your buyer will be and what they want in a business. Then, we build it to suit their buying criteria. There are five different types of buyers. About 90 percent of all buyers are first-time buyers — my favorite! There are also turnaround specialists who may be interested in companies that did not build to sell (but we don’t typically deal with them). The third type of buyer is the sophisticated buyer, who is a veteran of bidding wars and business buying. The last two are strategic buyers who isolate and target specific industries most likely to increase congruent revenue streams, while the last type of buyer is also a private equity buyer who has millions of dollars burning a hole in his pocket (and who is itching for a good cash-flowing business to invest in).
Create a business that works for you rather a job where you just go to work every day. We work with our clients to determine if they should sell and go — or hold and grow; then sell and go. My firm evaluates the four P’s: People, Product, Process and Profits in order to grow the business.
When it comes to people, it’s important to have the right team in place. As my friend Donald Trump states, “Surround yourself with people smarter than you.” The second is to evaluate the product, and then look at whether the company has efficient processes in place. One of the most crucial aspects that buyers want to know is if your business is automated. This means that the buyers want to know if there are already systems and processes in place that would help make the transition between ownership as easy as possible. Who takes care of your business when you are away on vacation? Can it operate independently from you for a couple of days or a couple of weeks? This is the deadbolt lock to a buyer’s heart if your business has a structured automation system in place, because even after you are gone, the show must go on! The last thing my firm evaluates is whether the company is in a nice market or contains intellectual property, such as database assets. The companies that do so typically have big value in them — they can often be monetized in multiple ways. Database assets are the reason that Facebook paid billions for Instagram and WhatsApp. Capitalizing on database assets, and capitalizing or fixing the automation processes in place within a company, is typically how I obtain a 20 to 30 percent higher selling price for my clients. I have gotten so good at what I do that I have even been known to create bidding wars; that’s not arrogance speaking, it is experience!
In your daily job duties as a business owner, it is essential that you remain mindful throughout the times you spend working on your business and that you focus on the following: branding; intellectual property; the quality of employees and management team in place; the relevance of your business within its industry; maintaining and looking for creative ways to grow multiple congruent revenue streams; developing a healthy customer base; high profits (of course); and, most importantly, keeping your financials squeaky clean.
Daily maintenance is a pain … that’s why I hire a housekeeper. However, the money I pay my housekeeper helps save my own energy so that I can focus on working hard to keep my other house — the financial one — as clean as she leaves my lovely home. Daily maintenance in your business can be as simple as making sure your software systems and hardware are up-to-date and efficiently operational, or making sure any licenses associated with your business are evaluated and current as well.
Lastly, it is imperative to clean your financial house and know your numbers down to the penny. Know your profit margin, and manage your overhead. People don’t plan to fail, they fail to plan. I help my clients plan their end game and reverse engineer it.
Real Life Build-to-Sell Example: Graphics Company
Initial Company Value: $500,000
Business Problem: The owners were looking to sell, because they felt that they did not possess the business acumen to grow the company.
Potential Point: Turning down 6,000 clients per year, because they did not have the resources to meet the clients’ demands.
Selling Problem: The selling price was not enough for the owners to enter the next phase of their lives. If I would have let them sell right then and there, the two owners would have had to get other jobs, becoming employees instead of what they truly were — employers!
Selling Solution: Hold and grow; then sell and go — through a partnership that enabled them to hire 10 new employees, rent a 5,500-square-foot building, and obtain additional software and hardware for their increasing number of clients and projects.
Time Frame: Five years
End Game: The company is on track to sell for $15 million — now that is how you literally build a business to sell for millions!