One of these days, you are going to sell your business. The question is, at what price?
If you have a few years of runway left before you pull the trigger, there are three things you can do to really drive the price upwards. And they don't require you to drive a dime of additional revenue. You'll want to, of course....and if you do as I suggest, you'll be able to.
The key to it all is thinking about the sale from your buyer's perspective. His biggest concern is...
...THE BLOODY RISK
Entrepreneurs and buyers of businesses take risks, that's true....but that doesn't mean they like it. Human beings are notorious for being loss adverse. I have more than a few business owner clients that are worth millions of dollars through their business, but that also have tons in cash because they just can't get comfortable investing the money in the stocks or bonds of publicly traded companies.
This simple insight is important when you think about what you can do to position your business when you put it up for sale.
So, what are the risks that buyers are concerned about? First, it's a concern about the future. Second, there is the concern about really being able to run the operation. And third, it's about the company's employees. Let's talk about each in turn.
RISK #1 - THE FUTURE
Businesses are not static enterprises. They are always either growing or contracting and your potential buyers know it. Buyers will be keenly interested at your past financial performance and they will dig into the numbers, but they also know that the value of past performance is limited (remember Yahoo, Lotus Notes, Word Perfect, Atari, etc.). You have to be able to show them not only the past, but a vision of the future. I don't mean a dreamy, go smoke something kind of future. I mean a somewhat guaranteed future.
For example, imagine that you have the opportunity to buy one of two businesses. Both operate in the same "space" and both had the same revenues and net profits last year. But one of them has contracts with clients for 1 - 3 years in the future and the other doesn't. Which business would you rather buy?
The one with the contracts!
That's the best kind of recurring revenue you can have and if you can incorporate this tactic into your business model, you might be able to sell your business for DOUBLE what a traditional business is sold for. Why? Because you helped the buyer manage the downside risk of unknown future revenues.
If contractual revenue models aren't going to work for you, there are other recurring revenue models you can study (see the hyperlink above), so try to implement one of them.
When it comes time to sell your business, just make sure you can tell the story about how your business manages the risk of future revenue. It matters.
RISK #2 - THE BUSINESS OPERATION
I've been a financial guy my entire life. I know a lot about numbers. I've learned a lot about marketing and operations. But I don't know a damn thing about the restaurant business. I could look at the financials and tell you how a restaurant is doing, but I sure as heck couldn't run it on my own.
This is where business systems come into play. Business systems are simply processes that are designed to create predictable results. Now, I'm sure that some of you are just naturals when it comes to getting things done the same way every time. If you're one of these types and you've not heard this before, let me be the first to tell you that you are like life in the universe. You are very, very, very rare. That's a polite way of saying that you're a freak of nature. Don't bet the value of your business on others being like you.
Systems are the way the rest of us operate. Systems create that predictability. You would be very hard pressed to find good businesses....that are worth a lot of money....that don't also have great systems. Think Subway, McDonald's...or my new favorite burger joint...BurgerFi...as examples.
S.Y.S.T.E.M. - SAVE YOUR SELF TIME ENERGY and MONEY
Pick an industry - medicine, technology, finance, real estate, widgets, etc. - and every one of them has a business model that works something like the image depicted below. The question is, what SYSTEMs do you have in place to make those thing happen? If you can build those systems - just processes - into your business, potential buyers will like it.
And they will pay a premium price for your business because of it.
RISK #3 - THE PEOPLE
Years ago, I read a quote that said "A business is the lengthened shadow of one man." My ego likes that...but the philosophy does have its limitations. Because if it's true, then the business is over if you are ever hit by a bus. Or retire.
Yet for a lot of businesses, this is true. Only the owner really knows the process of making things run. Only the owner has relationships with customers. Only the owner knows the suppliers.
If you are a buyer of such a business, what have you bought when the founder is gone? Nothing. What would you pay to buy a business like that? Same thing....NOTHING.
So what you need to do is have good employees with a solid second in command. Buyers love to know that there is a good person still in the business when you're out of the picture. It reduces their risk. And they'll pay you for it.
There are a lot of other things you can do with your business to help sharpen things around the edges - asset sale vs stock sale, ESOP, trusts, deferred sale, etc. - but the above are that things that are core to the actual price you'll receive.
Bruce Wing, ChFC, CLU, RHU, REBC
Strategic Wealth, LLC
5975 Shiloh Rd, Suite 114
Alpharetta, GA 30005
Tel: (678) 456-5060, ext. 101 | Mobile: (678) 814-3667
Entrepreneur, financial guy, husband and father of two great kids.