When I started my information technology business in 1983, the last thing I thought about was how I was going to exit the business. That’s true of so many small business owners, especially owners of family owned businesses. I eventually sold the business and luckily it was mature enough that lots of systems were in place. I didn’t have a particular crisis that forced me to sell. I was lucky, but what if I hadn’t been so lucky?
Whether or not you plan on selling your business, maybe you should grow it as if you are going to sell it. Business brokers tell me that most often small business owners aren’t planning to sell their businesses, but then life happens. You need to move. You get divorced. You have newborn twins or an ill parent or you yourself become ill. You lose interest or get extremely motivated to pursue another interest. Whatever your personal reason, you want to get rid of the business immediately and, while it has value to you, it won’t have value to anyone else unless you’re building it correctly from the start.
A good strategy when starting a business is to think what your exit plan is. Are you growing it to sell it? To take it to an initial public offering? To give yourself a job that you love? To pass it down to future generations? To create lifestyle freedom and flexibility?
It’s important to know your goals and how this business will further your life goals right from the start. It will effect your choice of business entity, C Corporation, S Corporation, LLC, sole proprietor (at this point should be careful with theft and its better to hire Identity Theft Cherry Hill specialists). It will effect how much time you put into it. It will effect whether or not you have partners and who you choose.
Making Your Business More Valuable
Here are some things that make a business more valuable to another party. If you institute them right from the beginning, you’ll enjoy your business more, you’ll have a stronger business, and it will be closer to being sale-ready in case ‘life happens.’
- Build your customer list in one place. Many small business owners have a customer list in the accounting software, some names in a database, some other names in a few spreadsheets. If you have sales people, they have their own lists. If you have service people, they have their own lists. If you want smooth customer relations now and be able to point to a strong client and prospect database for potential buyers of your business, you’ll bring all these lists together and make every name the property of the company maintained in a company wide database or customer relations management (CRM) software program. Added benefits are that staff can more easily help the firm’s customers even when their fellow staff members are out of the office.
- Develop a high performance team of engaged employees. A company culture that encourages people to think on their own, take risks, take responsibility for doing what it takes to delight customers, and be accountable for their own goals doesn’t happen over night. It takes a management attitude of praise, empowerment, coaching, collaboration, really being interested in each individual’s personal goals and development. When fear of failure is minimized and initiative is encouraged (even if it leads to mistakes) people learn tasks better and they learn that they are capable of learning even more. The benefits are that you get to take a vacation and know that everything will still run without you because you have a capable team. You will retain your best talent and keep the learning in the organization. A potential buyer will pay you more for your business because the business is not just all about you. Do you want to retire? Did a family crisis come up? Need to sell now? At least your business can run without you on a daily basis until a buyer can be found and the purchase transaction completed. You can attract different kinds of buyers. The individual buyer may not be particularly knowledgeable about the business. It gives this buyer time to ramp up. There are lots of individuals right now who have been laid off from corporate jobs and now are going to follow a long-held dream to own their own businesses. Or serial entrepreneurs looking for an investment business where not a lot of management is needed. Or larger businesses in the same industry who are buying your business to expand into a new geography, niche or technology. A business like yours with a highly responsible team that can run on its own on a day-to-day basis is very attractive because it spells reduced management and change costs for them. Their new group is profitable from day 1, even without you.
- Get your accounting fully up to date and keep it up to date. You will be asked for all kinds of financial reports to get potential buyer interest, to sustain interest, to discuss the terms on a letter of intent and to move into due diligence. You’ll need 3-5 years of financials. So if you might sell your business 3-5 years from now (or have a personal emergency or change-of-heart about owning this business), you better start now to make your accounting function into a reliable trustworthy system. That includes your people, software, internal operational systems, tax payments and CPA. By having a reliable system to make sure you’re handling all the sales tax, payroll expenses, loan payments, etc., you’re less likely to have embarrassing and deal-killing issues come up during due diligence. The benefit now is that you will have much better management tools and reports and make better decisions to grow.
There are other considerations. Certainly potential buyers are interested in customer and vendor relationships, the status and trends in the industry and a wealth of other factors. But if you pay attention to the three factors above, you will be managing your business well, whether or not you sell it. Then if life happens, you’re well positioned with a stable measurable foundation that spells value for a potential buyer.
If you have bought or sold a business and can throw light on what you did do or wish you had done to get it ready, please share it. Comments are greatly appreciated by all so this can be a learning blog for everyone.