How to structure your business to sell for an even higher price
The ideal time to sell your business is when you are doing well. Not when you feel tired and worn out by the daily grind. And, unfortunately, if you sell your business at the wrong time, you are going to sell it for well below what you may be expecting.
In addition, the nest egg you thought you were building won't last the distance and you could be even forced to get back on to the treadmill of work, work, and even more work.
And, although the foundation for the sale of your business should have been laid from the day you opened the door, don't wait until the time is right to commence your planning to sell.
Ten Key Check Points
There are a number of reasons behind what makes a business more valuable than others. However, the best way to analyse the value of your business is to look at it from the buyer's perspective. Put yourself in the shoes of the buyer and ask yourself the following questions:
- Does your business make real profits? (must include the remuneration for the business owner's time and effort)
- Are the current profit levels and margins sustainable for the future? (Can the buyer sustain the current levels of sales and profit when they take over your business?)
- Is your business solely dependent on you for its success and profitability?
- Does your business have a good spread of customers? (Revenue from the top 10 customers does not exceed 40% of the total sales)
- Does your business have systems in place to manage your workflow and minimise errors?
- Does your business have an operations manual, documenting the major processes in your business?
- Does your business have regular training sessions to improve your team's effectiveness?
- Does your business have a website that actively generates leads and sales, rather than just being a brochure site that provides information?
- Does your business' management information systems provide the following information on a regular basis?
- Breakdown of sales and relative profitability
- Breakdown of sales by customer / client
- Source of all leads / new customers
- Stock turnover ratio by product items
- Profit margins by product / services
- And, finally, if you were to consider taking a three-month holiday, would your current management structure, systems and processes sustain the current performance in sales and profitability?
To Sell Your Business - Take Three Months Off!
The question you may be asking is 'what has taking three months off got to do with selling my business'?
Well, the reality is, that for many owners, the dream is to have their business built with the capacity to be profitable without sole reliance on them. With a business that is heavily dependent on your skills, time and effort, you have become the major risk to your business, whereby its survival will be jeopardised if you were not available.
Therefore, your business will lose its attractiveness to a potential buyer if its earning capacity is dependent upon you - unless you are part of the package. When a business relies heavily on the owner, then they tend to work ridiculous hours to keep things going - so, do you think the potential buyer will be keen to take on that opportunity?
However, whether you are preparing your business for sale or you are planning for a well deserved three-month holiday, the following principles are applicable for any business owner:
- You - are you mentally ready to separate yourself from the business? This is easier said than done. You are the creator of your business and have nurtured it to its present form and size. The history is shared between you and your business, and the emotional bond is strong, something you may not have consciously acknowledged.
- Your Business - do you have the right mix of systems, manpower, clients and suppliers? You may be too close to answer this question rationally, and therefore need to get an external perspective. Ideally, your accountant will be able to provide you with a financial health check of your business. You may also explore engaging a consultant to give you a sound assessment of your operational and management systems. However, the best form of feedback is from your customer. Our experience has shown that when you get into their world and ask them for their input, they provide the critical indicators of your business' performance. Whether this be done by conducting a phone survey or a focus group or even an on-line survey. Sending a questionnaire by post often gets caught up in their day-to-day activities and you might not get the response you're looking for.
- Your Future - looking beyond the sale of your business or the holiday? Have you identified your next game or the mountain you want to conquer? Your journey should not end at the sale or holiday, without having something to look forward to, you could, believe it or not, subconsciously sabotage the whole exercise.
A Business Plan with a Difference
Regardless of what stage your business is at, a business plan is a good business discipline to have in place. However, another useful tool, with proven success, is the Balanced Scorecard.
The Balanced Scorecard overcomes the limitation of the traditional business plan, which relies heavily on financial measures for performance management. The problems associated with using financial indicators alone, are firstly, with figures such as revenue, the ROI are lagged indicators - they reflect the past. Secondly, they do not provide business owners with a comprehensive view of their business. In addition, any business which is driven solely by financial figures tends to have a short term, rather than a long term view.
And, most business owners would agree, that a profitable business is fundamental to creating future value through investment in customers, suppliers, employees, processes, technology and innovation.
The Balanced Scorecard adopts a top-down direction with a bottom-up support framework. It assists you to clearly articulate your vision, mission and strategies by setting realistic and measurable targets. So, of particular value, what this means is you will not be left with some 'fluffy' vision and strategies, and then wonder what you need to do to accomplish them.
The Balanced Scorecard challenges you throughout the whole exercise by 'forcing' you to look at your business from four perspectives:
§ Customer
§ Financial
§ Process
§ Learning & Development
The Balanced Scorecard is more than a measurement framework, it provides business owners with a clear map for focus and moving forward, and it is an effective communication tool for sharing your vision and success with both internal and external stakeholders.
More importantly, the Balanced Scorecard provides you with a holistic view of your business, as well as a tool to measure and monitor your results. Remember, you won't know if you are winning if you don't keep a score. A final word, however, on the Balanced Scorecard - it is not a recipe of 'how', rather, it shows you the 'what' - the critical ingredients for the success of your business. And, this information alone, will be music to your prospective buyer's ears!
Caption for the Balanced Scorecard diagram
The Balanced Scorecard provides you with a holistic view of your business. Balanced Scorecard was developed in the early 1990's by Drs Robert Kaplan (Harvard Business School) and David Norton.
Ten Critical Steps
Preparing your business for sale is a journey and, one that you need to be mentally and emotionally ready to embark upon. You'll need a simple, but effective program to assist you to go through that journey and to keep you on track. The following steps are a recommended plan of action for you to consider.
1. A plan of action
Drafting plans do take time and a lot of business owners choose to forgo the planning stages for the sake of some short-term time savings. Depending on what state your business is in, it can take a business owner an average of 18 months to get the business ready to sell. Can you image running a program without knowing the next action, for a period of 18 months? When you have an active action plan -one that is being used and updated, you will know immediately what progress is being made.
2. Get clarity - Why, When and How
Why do you want to sell your business? There are good reasons and there are other reasons which may not be for your best interest. For example, selling your business because you are tired of it may not be a good reason.
When do you want to sell your business? This will help you to set your game plan and establish major milestones, without the temptation of taking short cuts and under-valuing your business' potential.
How do you intend to sell your business? Are you going to participate in the whole selling process or are you going to engage a third party?
3. Ask for help - bring in the specialists
You may compromise the value of your business by attempting to do everything yourself. By engaging specialists, not only are you free to manage the program but you are likely not get bogged down with the nitty-gritty details. In addition, you will have access to specialised skills and know-how at your discretion. It is highly recommend that your accountant should be your first point of contact, to have a clear understanding of your business' financial situation. Select your advisors carefully.
4. Business Plan.
Absolute must.
5. Get your finances in order
A priority for a potential buyer will be to ask their accountant to look at your finances. This is where your accountant is invaluable and it is important that you do understand what picture your financial reports are projecting.
6. Packaging
One should not judge the book by its cover. However, without the proper packaging, the memorandum you prepare will not do justice to your business. How your business is presented to potential buyers will have a big influence on the price they are prepared to pay. Think of this as a marketing document.
7. Who are the potential buyers?
Get a clear profile on your target buyer. This will have a significant impact on how you prepare your business for sale. 'One size fits all' does not do too well in today's highly competitive and sophisticated market. Is it a consortium, a group of investors, a competitor or an individual? Obviously they have different needs and agendas; hence they will be attracted to different aspects of a business. The greater clarity you have of your potential buyer, the greater chance you have to successfully identify what appeals to them.
8. Your involvement after the sale
Be honest with yourself. Employers do have difficulty with taking orders. Need we say any more?
9. Doing the deal
There are a lot of advantages in engaging a third party to represent you in the sale of your business. It is hard not to get emotionally and personally involved in the negotiation, after all, your business is your pride and joy. There will also be a lot of backwards and forwards discussion, which will drain your energy and time. Obviously there is a cost involved in engaging someone and you do need to choose very carefully should you decide to take this path. Do not take it for granted that everybody is professional and takes pride in their work. Do not be shy to ask questions and reference checking is definitely a must do.
10.The Price
What is your expectation? What is your minimum price? If you are not too sure then it is worthwhile doing some market research. Another guideline is to ask yourself this question: 'would I pay this amount for this business myself?' and make sure you answer this question honestly. The more information you have on hand and have clarity on your expectations, the easier and 'cleaner' your negotiation process will be.
Finally, the question you must ask yourself is 'would you buy your business for the price you are asking for?' If you have the slightest doubt, you need to revisit your strategies. Your business should be more than just a good investment, it should be a great place to work at and a place you enjoy turning up to day after day. If you can demonstrate this to a potential buyer, you will have a better chance of getting the price you want.
