All of us will exit our business at some point. The day will come when we sell it and move on or life or health will force us to exit.
We have many options between today and that day. But when that day comes, regardless of which option you take, you are going to want to have a business that is independent and salable (i.e. a business someone will buy).
Having your business be independent (of you) may be more important than you realized.
Let’s jump into the reality of getting your business ready for a future sale and what that might look like.
These lessons are important for all business owners to know early in the process.
The Buyer Doesn’t Want To Buy Your Job
Very few buyers want to buy your job. In the rare case you do find a buyer for a business that wants to take over your job they are going to offer a much lower sum for your business.
The typically buyer in today’s market wants to take the operations of the business as a “turn key” meaning that they want to just walk in and be ready to go. Sure, as an owner of a business, there will be strategic and other decisions to make. But the typical buyer isn’t looking to run the business all day every day.
So if we are looking to position a business for sale what we need to do is get the business is such a position that the buyer isn’t buying your job. What they should be buying a set operations and a team that runs largely independent of you (more on this later).
The Buyer Really Wants To Buy Cashflow And Opportunities
Buyers typically come in two types: financial buyers and strategic buyers. Both are buyers for the business but they have different outlooks and needs.
The financial buyer wants to buy your business because they want to make a profit on their money invested. A financial buyer will typically put money in and look at the calculated cash flow coming back from them business. Rarely does the financial buyer want to put significant time into the business or trade time for money. They want to buy an income stream.
The other type of buyer we see is the strategic buyer. Like the financial buyer the strategic buyer wants your operations. But they typically want to do something with the business beyond collect cash flow. Maybe they want to merge operations with an existing business or somehow substantially change your business to build something different. Think of Facebook buying Instagram.
The strategic buyer doesn’t want a job either. They want a business they can change, reposition or grow.
Independence From The Owner Is Key To Value
Since virtually no buyers want to buy a job – or more work – having the business being independent from the owner is critical.
For most companies the equation is simple: more independence means more value of the business. The more a buyer is going to have to replace your labor efforts on a week to week basis the more that’s going to cost them.
Also the more the owner is necessary for the business the more risk for the buyer. If something happens to the owner after the sale or if the owner won’t cooperate with the buyer the buyer could end up in a very awkward position. In the most extreme cases the business could lose substantial, or all, value.
So think of independence as value.
Hard Pass For Companies Without Independence
I’ve also seen buyers walk away, or take a “hard pass”, on companies that don’t have an independence between the owner and operations.
While in many businesses an operations manager could be installed to replace the owner this is often a risky and uncertain transition. Most buyers would prefer that the seller do this work before selling them the business.
If your business lacks independence you might not only hurt valuation – you may also lose buyers.
The Options of Independence
Not only does independence of the owner increase value directly it also impacts value indirectly.
Buyers will pay more for an independent business that doesn’t need it’s owner in day to day operations. We’ve covered that. But another thing happens with an independent owner: more options are created.
If the owner doesn’t need to be doing day to day operations they can get involved in the strategic side of the business. They can work on the planning and direction for the entire operation from a higher level.
This might mean new customers, new product lines or other growth operations. So while the business with an independent owner is worth more now – it’s also worth more in the future when the time comes for a sale.
Making The Company More Salable
So how do we make the company more salable? For a higher price?
We need to start removing the owner from the operations of the business. We need to start replacing any routine functions the owner does with employees within the business.
We need to build systems and processes for everything.
Think in terms of what the buyer wants. The buyer wants the owner to walk out, and for them to walk in, and for the business to be just as it was under prior ownership.
How can we get there? Think of that as you make decisions and you’ll start making the changes your company needs.
What To Do Now
So what do we do now?
The first step is to think differently. Start thinking of your company as an asset for sale. Start buying it as something to be showcased and sold.
That means systems, processes and independence from the owner.
Small steps lead to big steps.
What can you systematize and delegate, today?
By: The Our Shawn McBride, is the man you call when you want a keynote, training or a consultant to get your business ready for The Future of Business. He’s the host of The Future Done Right(TM) Show and a long-time business attorney. If you want regular content on the future of business subscribe to get new blog posts from us here.
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