Business Sale Building Blocks
The prospect of selling a business, or at least positioning it so it can be sold, will be confronted by all business owners eventually. It may be for 20 years down the track (rare) or to sell now (more common), but the simple reality is that all businesses will have a change of ownership at some point.
The burning question for most owners is, “what do I have to do”?
Selling a business can be a relatively easy process, providing of course – you have a business which is worth buying (from a buyer’s perspective) and is sufficiently defined to be saleable.
To quickly define, a saleable business is one which can be sold to a new owner and continue to return a profit, once the outgoing owner has left. If all of the contacts, processes and know-how are all just in the owners head, then this is virtually impossible to sell.
To plan for the eventual sale of a business and maximize its enterprise value, consider the following “4 business sale building blocks”. Each has its importance, but the dynamics of an individual business may mean that some are more critical than others.
# 1 Financial performance of business
This is a critical component of any business valuation, as to sell the business it must be perceived as having value. Value is typically a measurement of performance from trading statements, however brand value or positioning can also influence this.
The bottom line for the financial performance is simple – if there is none, then there is little to interest a buyer – as they will be looking for a return on their investment.
Test # 1 – review your financial performance to see what sort of value a buyer would see.
# 2 Processes and systems for key outputs – aka “the secret sauce”
In the most basic manner –a buyer is looking to acquire a business, a system – which is going to make them money. To do this the business must be mature enough to have the necessary systems and processes (how it sources new clients, it’s sales strategies, how it manufactures or delivers it product, maintains its client relationships, it’s R&D processes, etc. ) in place to enable it to run – profitably – following the exit of the prior owner. These processes can be likened to the famous “secret sauce” and must be captured in a way that enables a buyer to implement them and make money.
Test # 2 – consider your business and break down the different sections of your business; marketing, sales, production, delivery, maintenance, finance, people and then look for the processes/systems that you have in place. Are these well-defined and present in the business when you are not there?
# 3 Staff to cover operations
Having the right people – number, quality, structure and accountability is important for the sustainability of the business. There is no “right” number of staff – but the calibre of staff and their abilities are very important. To put this into context, in a business everyone should have a capable “second” who can step in and “do the job” when required. Normally their level of proficiency will be a bit lower, but in the main they can get the job done.
Equally important from a sustainability perspective is the level of accountability allocated in the business. If all decisions are restricted to one person, then you have a significant concentration risk on that individual (often the owner).
Test #3 – what is the calibre of your staff like and who is making all of the day to day decisions? Could your staff (business) operate without you?
# 4 Control and reporting of outputs
What is being recorded, what is being reported, what is being managed? The technique I use here is measuring, monitoring and managing. Every business has key performance levers; be they sales, gross margin, opportunities in the pipeline, sick days, product numbers per hour etc.
Whilst there is an endless supply of things which can be measured in a business, the objective here is to remove the noise and measure, monitor and manage the critical ones for your business.
Test #4 – What are the five critical levers in your business which MUST be measured, monitored and managed? Are they being MMM’ed at the moment, and if not – how are you running your business?
The Real Test
The litmus test for any business is whether the owner can go on leave and have the business still operate profitably during their absence. To define this, I call “leave” as more than 6 weeks, with no phone! If you can reasonably do this, then at a base level -you have a saleable business framework.
Final test – how many weeks leave can you take – with no phone access, and have your business continue to run profitably in your absence?
Building your business with these basic building blocks in place will mean that you have positioned your business to be saleable at a future point. This allows you to concentrate on building its financial performance to maximize its business value. If however you run through these tests and find your business is not well positioned, then don’t worry – all of these can be built, but you need to allow some time to do so!