One of the first questions I ask business owners is “What do you want to do with your business?” Unsurprisingly the response is typically “To sell it one day”, but that is about as much thought as they have actually devoted to the idea.
Most businesses I come across are income business. The owner has originally set out to replace their income generally from a job they didn't enjoy and, as a result, have built a business around their skills, which has allowed them the freedom to work for themselves and create a modest and comfortable living. The business owners have however spent their time building an income based business and often the excess cash has been invested in real estate and superannuation. Rarely do they build the inherent business assets required to add value for the next business owner and this is just leaving money on the table especially once we start applying multipliers to the valuation.
So I ask them….”Why would I buy your business”?
This is where I just love the entrepreneurial spirit. I hear them passionately tell me why the business is valuable "to them". How they have locked in some great deals, made good money in the past and of course how wonderful the future looks if I were to buy the business. In fact even after toiling away for the past 5, 10, 15 or even 20 years, and somehow it is now about to triple in growth, in the next 12 months, unlike any period before that. Always the optimist, always looking at the bigger picture, but often just not quite hitting the mark.
The Goal is Wrong
The number one reason why investors wouldn't want to buy your business today is because you had your goals wrong in the first place. If your goal is to sell your business one day, then the end game has always been the transaction. An investor is not interested in how much money you make when you sell out, they are interested in how much money they will make after they buy your business.
So from the outset, the goal must always be “How can I build a business that is valuable to someone else”?
The business must be able to grow well beyond where you have taken it and this must be perfectly clear to the buyer. If you leave it up to them to work this out then it will all be just too hard and they will quickly look elsewhere.
The best businesses to sell are those who have already mapped out their exit strategy with the buyer in mind.
This helps you set a clear goal on who would buy the business so you can build it for them. Then when the time is right the business will be compelling for the right buyer.
To help set you up for success, I look at 5 key areas with business owners that will build value into the business that investors will recognise and be prepared to pay for.
1) Assets
This is not necessarily what you think. A business asset that I would value highly is not the bricks and mortar or stock. These are easily bought and sold and rarely leveragable unless they are truly unique.
The truly valuable business assets are the intangible assets that make the business unique.
A leveragable asset is one which is not owner dependent and allows the business to highly scale a unique capability into new and existing markets to scale.
Valuable business assets are hard to replicate and will have been proven in current markets to show the buyer that by just doing more of what you have done in new industries, sectors or regions that this asset can be scaled to much greater profits for the new buy.
2) Culture
Acquirers look to buy other companies is to get something that they are not good at. Culture plays a massive role in these decisions, especially when the acquirer is a large corporation. Smaller more nimble companies are regularly sought for their ability to innovate, respond rapidly to consumer needs and, of course, their dynamic culture.
But can your business leverage the culture into a large organisation. Is this considered an asset and can it exist as an asset even if a few of the key management team and yourself are no longer there to manage it?
This will determine whether culture is, in fact, an asset of your business.
If your business has been built around you and your skillets then the value of your business will be heavily impacted at the time of sale and potentially even scrapped by most buyers as the proposition is just too hard so they will look elsewhere.
3) Capability
A bigger plan, specific know-how, proven execution and ability to replicate are the key factors in determining if your business has the capability to move to the next level. Just doing what they do in a new area is rarely enough to convince someone to buy your business.
Your capabilities need to be both unique and strategic. The buyer will want to know that you have the unique capability which can be strategically leveraged back into their existing business. I am sure there are other companies in your sector doing what you do and so if you have not been able to show your unique and strategic capability then your multiple is likely to be industry average at best. At worst they will decide to just do it themselves.
4) Clients / Partnerships
How will the market perceive the acquisition? This needs to look good from the acquirers side and one to the critical assets in this area is referenceable customers and new channels to market. Ideally, this will be 2-way.
The best deals will open up new channels and new products for both businesses, meaning that each business gets to sell their products in to the others channels.
Deals like this have the greatest chance of success if the product match and markets are right.
5) Systems
Systems are not just Computer Systems. These refer to any kind of system that makes your business run efficiently. These can be manual or paper-based systems, they can be cultural or process systems, but generally they are unique to how you do your business.
For private business owners, these systems will have grown up over time and may not be as well thought through as if they had been designed from scratch knowing what you know now. They may be an asset or they may be a liability, so be clear on whether you are selling this as a value to the acquirer or whether in fact you are seeking to be acquired to get access to their systems.
Summary
This is all about maximising the equity value in your business well before you are ready to sell it. When you sell a house, you can slap a coat of paint on it, fix a few broken items and put it up for sale. The difference between maximum and minimum selling price is negligible when compared to businesses. Planning to sell your business is not something you do when you are ready to sell it. A coat of paint doesn’t help and it can take years to get a business ready for sale at the maximum price.
The difference between 2 identical business with and without these 5 items in place could be quadruple the price. That’s a lot of money to leave on the table which, with the right planning and preparations, could mean a very different retirement or exit outcome.
This is your life's work. Create an asset that you are proud to sell to the next buyer so it can continue to flourish in new hands.
Keep an eye out for future blogs where I will discuss each of these 5 Assets in more detail.
About
Ross Hanson is a Business Builder who helps private business owners to Grow, Fund and Exit their businesses. Ross works with business owners to grow their business assets, fund their growth and exit their businesses through either a Trade Sale or Management Buy Out (MBO).
