As your business grows and evolves, one essential question you will need to address is the value of the business as a saleable asset. Remember, the value you see in the business has little (if anything) to do with its value to a potential buyer.
In addition, businesses are sold into a market — a market that goes up and down, that experiences peaks and valleys — a market that is subject to the volume of businesses being sold and the number of buyers looking to acquire them. In short, the value of your business is volatile and cannot be assumed in any way, shape or form.
Viewing Your Business as a Saleable Asset
But what you can do is build your business in a manner that strengthens its value as a saleable asset. The key word there is asset. Some businesses literally have almost no asset value to a buyer, even though they have been successful for their owners. That’s why you need to make some significant investments of time and money in building the business as an asset, and not just as a business that meets your personal goals today. Here are six essential strategies you can use to move in this direction:
Strategy #1: Protect and Diversify Your Customer Base
There are two major components essential to improving the asset value of a business. The first is to make sure the business can survive a transition of ownership successfully (internal strength), and the second is to ensure that there are no major points of weakness which can expose the transitioned company to undue liabilities (risk management). The customer base is a key place to look in order to address both concerns. Your customers should be loyal to the company itself, not just to the owner, and they should consistently pay on time and give the firm high marks for quality and delivery.
In addition, you should not depend upon any one customer too much, or even a group of customers. If more than 5% of revenue is coming from any one account, that’s a point of risk for a buyer (even if that customer was a hard-earned ‘whale’ that you spent years working diligently to acquire). That’s why you need to execute customer satisfaction surveys, provide customer courtesy follow-ups, and generally embrace your customers as essential assets to your business (because they are), while also working to reduce exposure to the vicissitudes of any one account.
Strategy #2: Establish Operating Systems
You know how to run your business. Congratulations, it doesn’t mean anything to a buyer because, presumably, you’re selling the business so you can go do something else. How is the business supposed to operate if you’re the only person who knows the secret recipes, the special formulas, the pricing and operating economics, the purchasing and vendor specifications? In fact, the more you keep to yourself, the more your business is at risk even now, not just when you go to sell.
Hire a consultant and get those operating systems defined, written, documented, trained and distributed. Then, prepare to build a management team that can execute on that operating system. And by the way, doing this also positions the business to scale. In fact, a business that is well prepared for sale is also well prepared for scale.
Strategy #3: Strengthen Your Management Team
The management team is your essential internal execution resource. You need a team, and that team needs to be able to operate the business without you. Remember, you own the place! Not having to make every decision or be there for every little issue means you’re being a successful owner, even if it feels like you’re failing as a doer. Every business needs servant leadership, but in this case the key is to demonstrate that leadership — and then position others to carry it on.
At a minimum, your team will need to consist of three essential roles: One person in charge of revenue (overseeing sales and marketing), one person in charge of operations and delivery (a chief operating officer), and one person in charge of accounting and finance (a chief financial officer). It is going to take time and money to build this team, but doing this is one of the single most important things you can do to strengthen your business.
Then, as you get closer to the intended sale timeframe, work with a qualified attorney who is experienced in business transitions to place this core team into a series of agreements or contracts that ensures they will stay through the transition (and benefit from it).
Strategy #4: Build Away from Owner Dependency
Operating systems and leadership are likely not the only area in which the business is dependent upon you. This is such a difficult point for many small business owners, that many take grave and deep offense when asked to work themselves out of running the business. The pride that comes from small business ownership (which is magnified exponentially every time we see those advertisements that show happy entrepreneurs in the midst of doing everything in their business), is so overwhelming that it can truly blind the small business owner to his reality.
And the reality is this: Running your own business single-handedly may feel noble, but it’s not economically productive. All you’re doing is burning yourself out and guaranteeing that the company won’t survive when you exit. Think about the customers who are only loyal to you and rebuff follow-ups from your salespeople, or the suppliers who you’ve known so long that you’ve taken vacations together — but they only respond when you call or email them. Make a list of all of the ways your business is dependent (co-dependent, actually) on you, and then commit to eradicating each of them, one-by-one.
Strategy #5: Reposition to Avoid Commoditization
You’ve run a printing business for the last thirty years, and it’s made good money. You have lots of customers, much of your equipment is paid off, and the business is cash flow positive. But…the business is commoditizing rapidly. Customers are getting accustomed to paying less and less for ‘good enough’ work, and as the digital revolution has arrived, your most expensive printing presses have received less work as the new digital presses have become the go-to-choice for most of your production. This is not a time to sit still, it’s a time to respond and get ahead of the market.
One option is to acquire another business in a complementary category, another option is to build a new business unit. Perhaps expand your design team to be able to handle web and interactive work, so that customers bring projects to you earlier in the production cycle and you don’t get pigeonholed as ‘only’ the printer. Or, maybe sell some of the lesser-used presses to fund the acquisition of another firm that has a stronger or more diversified market position.
The bottom line is, you need to avoid being commoditized, since this is one outside factor that can quickly and dramatically destroy your business value.
Strategy #6: Pay Down Debt and Improve Cash Flow
Finally, take the time to plan now for financial stability in the future. Consider paying down debt today so that your cash position is stronger (but don’t do it so fast that it makes the business appear to lose money — remember, an essential tool for valuing your business will be three years of trailing financials, so make sure they shine). But you can certainly refinance existing debt, consolidate it, sell or expense down assets you don’t need anymore, and get into stronger financial shape today.
By taking these six strategies as a blueprint for successful exit preparation, you are well on your way to a successful future when the time has come to sell. You can’t control everything around you, and certainly the marketplace has its own ups and downs. But by strengthening the core asset value of the enterprise, you maximize its attractiveness — even in a buyer’s market flooded with other sellers who most likely did not take the time you have to make the business sale-ready.