Business owners who are thinking about the ‘someday’ sale of their company should be aware of seven basic rules.
1) Have an exit plan
It’s wise to be thinking about your transition 3 to 5 years out to give yourself time to get your house in order.
a. Financial documents (P&Ls, Balance Sheets) should be accurate and consistent in their structure- don’t change your chart of accounts titles every year on your P&L or Balance Sheet.
b. Core business processes should be formalized and written down.
c. You should talk with an M&A advisor to get a market valuation on the business and compare that against your desired sell price.
d. And then, get with your tax and investment advisors to map out how to best receive the proceeds at the time of sale, and whether there are things you can do in advance that would be advantageous tax-wise.
2) Understand that you are not selling your baby
Selling a business is an emotional ride throughout the process. Up front though, the biggest issue is coming to terms with parting ways from the business that you have built over years of hard work. Most likely, you’re proud of your company and have real feelings about the employees who have helped you to make it a success. In effect, you’re selling the ‘stock’ of your company whether it’s an Asset Sale or Stock Sale. You are selling something with value. Buyers are not buying your baby. They are buying a profitable cash producing operation.
The next five rules are about driving up your company’s value. Buyers will definitely pay more for a business that has worked on the following items:
3) Develop a culture of growth
This is a mindset for your organization, even if you’ve been content or satisfied with a relatively flat but profitable operation over a number of years. Start today with the mindset that if growth is imperative and if you’re not growing then your competition surely is and taking market share. Buyers like proactive, can-do growth cultures.
4) Build an annual line item business operating plan (P&L and Bal. Sheet)
Put in the time to understand your numbers. Develop a management reporting system and reports (or Key Business Indicators [KBIs]). A business plan isn’t just about Revenue, COGS and Expenses. It includes a strategy and tactics for Marketing, Sales, Operations, Manufacturing and Financial Wellness. It doesn’t have to be complex- just a few key initiatives for each. Buyers like businesses run like real businesses, not hobbies or lifestyle supporters.
a) Understand the difference between cash flow and profit.
b) Train your managers to understand business financials.
c) Implement you plan and stay at it.
d) Delegate, monitor, follow-up and adjust as the business year plays out…this recent COVID19 pandemic is a good example of needing to stay on top of economic changes and pivot to a new approach to stay solidly profitable.
e) Have consistency in year to year financial statements.
5) Develop annual, aligned Marketing and Sales Plans
First, understand the difference between Marketing and Sales. As noted previously, these plans are a part of the overall business plan. Buyers want to see a marketing and sales machine that can generate growth.
a) Follow the sales plan and have KBIs for sales team as a whole and each individual salesperson.
b) As Owner/President, it’s your job to focus on your key customers. You don’t need to have account ownership, but you have to talk to them regularly and have a pulse on the relationship.
6) Reduce dependencies in your business
The most important one is to reduce any dependency on the you, the owner. Buyers want to inherit a team that can think, make decisions, and operate the company profitably.
a) Stop micro-managing and making all decisions.
b) Get your management team to work together for growth, not be bogged down protecting their ideas, their tasks, etc. Build teams and make sure they work together.
c) Get to the position where you spend time working on innovation, not problem solving.
d) It’s always about people, and where there are issues or opportunities it always comes down to having “the right people in the right seats on the bus.”
e) Listen to your employees. Really…they have some great ideas that you may not have tapped into.
f) Make it goal to take a month-long vacation with no ill effects to your business. And, while on vacation you are allowed only one check-in per day.
Two other dependencies to manage are:
a) Customers – do you have too many eggs in one basket, i.e., Amazon, Microsoft, Costco or Boeing?
b) Suppliers – do you a reliance on only one or two suppliers for key components? What happens if one or both go out of business or have to reduce output due to fire or a similar event?
7) Know your competitive advantage
Can you succinctly say what that is, or are you just like everyone else in your space? Buyers want to know why your business is special and how that can be leveraged. If you really don’t have one, you will get less value for the company. It’s always good to ask long time employees, customers and suppliers this question: “What is it that you think we do exceptionally well and how does that impact our ability to be one of the best, if not the best, in our market?”