The responsibilities involved in building and growing a small business are immense, and the list of tasks virtually endless. It takes a great deal of energy just to keep the business operating effectively on a day-to-day basis, and most business owners instinctively recognize that they need to put most of their effort into this priority to make sure that the business continues to operate smoothly.
In fact, small business owners often become so personally intertwined with the company they own and operate that they can’t really envision themselves living without the business. And yet, living without the business must be the objective of every small business owner.
Preparing for that milestone — the day when the business is sold or otherwise dispositioned and the owner moves into retirement or another post-ownership lifestyle — is critical to your overall financial health as a business owner.
That’s why your accountant and other business advisors should make sure to ask you about your vision for life at, and after, business exit, and help you make decisions today that will prepare you and your company for that transition. After all, your business is likely your greatest asset, and you need to take care of it just as you would any other major asset, such as your home.
Here are five things every small business owner should do to prepare for exit…today:
1. Understand the value of your business, and how to build that value.
The first time you hire an expert to perform a valuation analysis of your business should not be the same day that you have decided to sell the company. Instead, it should be years ahead of that point — in most cases, as early as possible.
The valuation process looks at a number of factors, well beyond company’s revenue and EBIDTA. It also examines the nature of the operations, its self-sufficiency, market position and competitive environment — as well as the market of buyers for this kind of enterprise today, and the market of buyers forecasted in the future. As a result, the valuation can give you a roadmap of key priorities to focus on as you zero in on how to maximize that valuation in the future.
2. Focus on processes and the people to run them.
While some small businesses end up only able to sell the value of their customer list, this is akin to investing in a beautiful home and ultimately only being able to find a buyer for the garage.
One major reason why small businesses often struggle to present themselves attractively to buyers is that the customer list is the only thing that appears concrete — everything else is wrapped up in undocumented ‘how we’ve always done it’ processes and decisions made by the individual people in the business, rather than through consistent and documented procedures.
As a result, one of your early goals should be to document and define as much as you can about the enterprise — then hire people who can follow those procedures and who will, in turn, train others in the future to do so.
3. Put energy into building the business, but not being the business.
Many small business owners love being in the middle of the action, while others adhere to the myth that they can step away from the company even though they haven’t created a culture that will operate effectively without them. Both concepts are dangerously false.
Instead, a strategic owner will systematically lead each area of the business, document it, set standards, then train a replacement to manage that function effectively, and move on. This is why you shouldn’t get wrapped up in only the areas of the business you enjoy (for some CEOs, this is operations while for others it means business development or sales). Instead, you need to be able to competently run every area of the firm, then hire and train others to follow in your footsteps.
4. Don’t kill the goose before it lays the golden egg.
Small business owners have to deal with an inordinate volume of taxes, fees and compliance requirements that can easily overwhelm anyone. At the same time, owners do receive some benefits in the silver lining of ownership. From a company-assigned car or a business or golf club membership to tax deductions for business travel, owners can take care of themselves in a myriad of ways.
Unfortunately, many small business owners get trapped in this space as they become comfortable with a lifestyle that, while empowering and enjoyable, risks running the company dry. Remember, you need to invest a great deal of money back into the firm if it is to grow. If you don’t invest enough or if you become too complacent, the greatest threat to the company can ultimately become you, the owner.
5. Develop strategies to address the seven P’s.
Nearly every college-level marketing class begins with a review of the “Five P’s” of marketing, which are Product, Place, Promotion, Price and Profit. Today, we can add Packaging and Positioning to that list.
What these all have in common is that they dramatically impact the future competitive viability of the company, and therefore, its value.
For example, your firm may be growing and revenues might be strong, but if you win business by under-pricing, then the more you grow the more likely it becomes that the company will fail to generate enough cash flow. And if your positioning in the marketplace focuses on appealing to an older age bracket, then the question becomes how long that age cohort will be purchasing from you — and whether the company can transition to successfully serving younger generations in the future. All seven of these priorities warrant attention.
Remember: It’s never too early to plan for your company’s exit strategy and for your ability to sell the firm to another owner successfully. Preparing effectively is critical to both your company, and to your personal financial future. Begin today by developing an action plan around these five strategies, and then sit down with your CPA to dig into the details and analyze options for creating the highest value you can in your business.