“Anyone who takes a ‘we’ll figure out how to profit in the future’ attitude to business is being ridiculous.” – Jason Fried, Rework
Here’s a largely ignored secret about owning a business. Often you make more money selling the business than running it.
Most business owners I speak with are so fixated on growth that they ignore the option to exit. They know all about the value of the car they drive and how to sell it. But, when it comes to what might be their biggest asset, they haven’t got a clue.
Let’s start with why selling your business should be on your radar.
- A typical sale could fetch 3 to 5 times your annual take home and all in one payout.
- The sale might allow you to retire early, or exercise your start-up muscles with a new venture.
- All the problems, irritations, and to-do’s that keep you awake at night are magically no longer yours.
- In many cases, new leadership can mean job security and new opportunities for your team.
Even with all these incentives, what’s most important is that you are motivated to sell your baby.
“Your business is your baby. You birthed it, fed it, mopped up the poop, and kept it safe. Of course, you feel protective.”
It’s your baby
Your business is your baby. You birthed it, fed it, mopped up the poop, and kept it safe. Of course, you feel protective.
What’s important to wrap your head around is that selling your baby is not running away. It’s about leveraging your hard work and investment into something even more valuable.
“What I have found motivates entrepreneurs,” writes Touraj Parang, in Exit Path, “is that they are involved in the creation of something that will have a lasting impact. That is exactly what a viable exit path enables.”
With my last exit, I didn’t have a choice—I had to sell.
Under the gun
When I sold my last business I was under the gun. I had about eight months before I needed the cash to complete my divorce. It turns out that the deadline was a blessing.
I needed a gun to my head to force me to look at my business differently. Instead of fussing over a never-ending list of to-do’s, my focus turned to selling one product – my company. And I had a lot of work to do.
Just like a homeowner preparing to put the ‘for sale’ sign on their lawn, I needed to get my house in order before I listed the business. So, I got to work on the five areas listed below.
In those short eight months, our monthly sales doubled, client churn dropped close to zero, and gross margin increased from 30% to over 50%. And here’s the part that still amazes me.
I stopped showing up an hour before my team, putting in 40 to 50 hours a week, and working most weekends. Instead, I doubled the value of the business while working only 10 to 15 hours a week.
“The reality is that the real value of most small businesses won’t be realized without some work. The secret is to start now.”
The reality is that the real value of most small businesses won’t be realized without some work. The secret is to start now.
What works while you own and operate the business is not what a buyer needs to see when valuing the business. It might take six months, or two years to prepare your business for a sale, but that time and work could be the difference between no sale and getting a sale at a price you want. As Parang wrote, “Hope is not a strategy.”
Here are five strategic levers that will help you get a sale and increase how much you get paid.
Five strategic levers
1 Find your niche
Here’s the deal. If you can’t explain in one sentence what your business does, you have a problem. A confused mind says “NO” and that applies both to the broker you need on your side and the buyer who’s going to write the cheque.
Three core questions you need to answer are: 1) who is your target market? 2) what problems do you solve? and 3) what makes your business unique? If you can answer all three questions convincingly – ideally in one sentence – you have a business you can market.
2 Remove the clutter
If you want a better price for your house, remove the clutter—your business is no different. Messy accounting practices, low-volume products, outdated websites, problem clients, and unhappy staff are red flags that will distract a buyer from the real value of the business.
A part of my role as a coach is to help uncover latent problems that erode profitability today and will frustrate an exit strategy in the future.
In my case, I had legacy products that were overshadowed by newer, more popular products. I used to think more products meant more revenues. After all, if only one in ten new clients buys that product it’s still money in the bank. The reality is that low-volume products have inherent costs of upkeep, listing, marketing, and fulfillment and can distract you from your growth products.
3 Fire yourself
The best advice my business broker gave me was that “Nobody wants to buy a job.” In other words, the more involved you are in the daily running of the business, the less attractive your business is to a buyer.
“A good test is to jump on a flight somewhere warm for a week and not check your email.”
A good test is to jump on a flight somewhere warm for a week and not check your email. Sure, some things will break, but you will quickly learn what your team can handle and what really needs your attention.
Removing yourself from daily operations might be the hardest, but most essential step in your preparation. Make it a goal to find one routine task every week that you can document (see #5) and delegate.
4 – Fill the funnel
This one is tricky but essential.
Every buyer wants to know where sales come from. If you don’t have a reliable sales funnel and conversion process start building them now.
In my business, I started by mapping out our sales process and then hired a lead generation company to fill my funnel. Once leads were coming in, I developed a simple step-by-step onboarding process for my clients that I presented to them as a part of my sales calls.
It took about two months to refine both processes but those changes probably had the biggest influence on the price of my business and building buyer confidence.
5 – Document your systems
This might be boring and tedious but documenting systems adds value. A buyer wants to know how your business runs without you and that’s what systems provide.
As an entrepreneur who deals daily with the unpredictable, you might be surprised at how much of your business is built on repeatable processes. Those are systems waiting to be documented.
Your business broker can help you identify gaps, but basic systems should address: sales, customer service, fulfillment, product, supply, administration, and finance.
I’m not ready
After three exits I’ve learned that selling your business is like most things in life; we often think about it too late. Selling your business could be the biggest reward for your investment of time and hard work and there is never a better time to start planning for it than now.