Even if you don’t plan to sell your business anytime soon, creating a company that will be attractive to potential buyers can benefit your business today as well as down the road.
Remember the last time you sold your used car?
Chances are you spruced it up in some way to make it more attractive to potential buyers. Most likely, you washed it and cleaned the interior. You may have even fixed a few problems, like replacing a leaky hose or a cracked windshield. In fact, the car was probably a bit nicer when you sold it than when you had it, and you may have had second thoughts about selling it!
One day you’ll probably want to sell your business, and you’ll want to get the highest possible price for it, just as you did when you sold that old car. Implementing strategies for that day, also known as business exit planning, will improve your chances of getting the right price and terms when the time comes.
But there’s more to it than that. Steps you take now to increase the value of your business for some future sale will probably make it run better today.
Here are some of the characteristics of your company that could simultaneously make it attractive to a potential buyer and improve the success of your business today, if improved:
Clear business plan
A big (and dangerous) misconception about writing a business plan sounds something like this: “Well, I don’t have to write a business plan. I’ll just file it away somewhere and never look at it again.” The fact is that the writing of the business plan is its biggest value. Writing a comprehensive business plan forces you to look at your business from every possible angle – cash flow, insurance, competition, marketing, logistics, financing, etc. Even if you’ve been in business for 10 years, writing a comprehensive business plan today could open your eyes to new possibilities and dangers. And a potential buyer won’t be very impressed if they ask you for a business plan and you point to your forehead and say, “It’s all up here.”
Clear marketing and sales system
How do you attract potential clients (marketing) and convince them to buy from you once you’re in front of them (sales)? What works best for you? What is your ROI for various marketing strategies, such as broadcast, print, direct mail and networking? What have you tried that didn’t work as well? How did you do it, where did you do it, to whom did you do it, how often did you do it, and why didn’t it work? Certainly a potential buyer of your business will want to know all of the above, and it will help you today to approach your marketing and sales system from an objective, clear, quantifiable perspective.
Concentration of customer base
Is the revenue from your customer base dominated by just a few large clients? That could be a red flag to a potential buyer, because having one or two of them leave right after the company changes hands could make a significant difference in future cash flow. A more evenly spread customer base is the goal for both the short term and for exit planning.
What would you say to a potential client who asked you why they should buy from you, and not from your competition? Can you rattle off a few advantages, based on your knowledge of the competition? Are you aware of your disadvantages and how to deal with them? A potential client you speak to today, or a potential buyer of your business in 10 years, will want to know.
Is your company a positive environment for your employees, or is it a constant revolving door? A potential buyer would much prefer to see that your staff has been with you for a while – not just because those people will know your products, processes and clients, but also because this shows it’s a good place to work.
Captured key employees
Most companies have a few key personnel outside of the owners. These are people who “get it,” who are indispensable to the smooth operation and success of your business. A potential buyer of your company will want to know that these key people will not leave when you do. Are you using golden handcuffs to keep those people happy, motivated and in place for the long term? There are non-qualified financial products that can help you do that.
Delegation of responsibilities
It’s the nature of most business owners to delegate as little as possible to others. After all, the business is your baby. But if the owner is the face of the business and handles all or most of the most important tasks, a potential buyer may be scared off. It may be that they don’t want to put as much time into the business as the current owner does. That’s why it’s important to have a . . .
Clear management path
If a business doesn’t have a clear path to some kind of management position, it will not only be a possible red flag for a potential buyer, it could also make it more difficult to keep your best people. Vague promises are not good enough – providing clarity to your staff on how to move up will provide motivation to stay and perform, especially for your more ambitious people.
Clear chain of command
Having a clear chain of command in your company is a function of communication. How smooth and efficient is the flow of communication in any given situation? Are there communication bottlenecks that slow down any processes? Are there ever times when progress stops because the person who is ultimately responsible can’t be identified? It’s sometimes easier for someone from the outside – such as a potential buyer – to see poor communication than it is for someone on the inside. Identifying and fixing communication bottlenecks will help you now, and it will help you later.
Smooth logistics and current technology
Where is your company on the technological evolutionary spectrum? From basic CRM (customer relationship management) software to complex supply chain and logistics programs, it’s almost mandatory for a modern company to stay up to speed on information technology. Remember that your competition is most likely doing it, and a potential buyer won’t want to deal with significant upgrades on the first day.
Clear accounting system and financial statements
Just as your technology can’t be stuck in the 20th century, your accounting system and financial data must be clear, up to date and accessible. Whether you plan to sell soon or not, a sloppy financial reporting system can easily lead to destructive inefficiencies. Further, a potential buyer may look at a lack of clarity as obfuscation – are you trying to hide something? – as well as a potential indication of sloppiness in other areas of the company.
A savvy business owner always has one eye on the future, and they know that sprucing it up today will make it easier and more profitable to sell when it’s time to leave.
Ryan P. Urban
I work with small and mid-size companies on business tax reduction, tax planning, cost reduction, business owner-specific retirement planning, employee retirement plans, risk mitigation, insurance and business exit planning.