By Trent Lee, the recipient of the award as the #1 business broker in the country by the International Business Broker Association (IBBA).
Is your business among the estimated 80% that will never sell? Statistically, the odds are that if you own a small business, your eventual exit will not involve taking a big check to the bank to live out your retirement on the beach. What can you do to change this statistic? Focus on these five areas and turn your current business into a successful exit — one day.
1. Focus on growing a business, not a job.
Small businesses are primarily valued at a multiple of the seller’s discretionary earnings (SDE). Each industry has an established market multiple. While you can’t control the multiple, you can control the bottom line of your business, and the more profitable you can grow and operate your business, the higher the valuation. A business showing SDE less than $100,000, even though it may be in the same industry as a similar business showing $500,000, will have a lower market multiple.
If the business is overly dependent on you, the multiple is going to be negatively affected downward. Here is a quick test: Ask yourself, and honestly think about the answer, what would happen if you went on vacation for 30 days? What would happen if you couldn’t answer the phone or email for those 30 days? If the business would be negatively affected, you need to start working on building people, processes and procedures and focus on growing a business, not a job. This isn’t easy for many business owners, but you need to get out of daily operation mode as soon as you can.
2. Clean up your financials.
It amazes me how often I meet with small business owners who do not track monthly financials. They operate their business from the “I have money in my bank account” mentality. If you plan to sell your business, then either hire a CPA/bookkeeper or hire and train someone in-house so you can start tracking, operating and making decisions from a set of monthly financial statements.
Without clean, reconciled and accurate financials, you kill your likelihood of a successful exit and significantly and negatively affect your business valuation. Buyers are interested in businesses that give them stability and confidence with a consistent track record. That is why they are purchasing an existing business rather than starting one from scratch. It’s your job, as a seller, to induce confidence that your business is consistently profitable, and you do this by having accurate financials.
3. Address any customer concentration issues.
If you have any single customer or client that makes up 10-15% of your total gross revenue, you likely have a customer concentration issue. There is a significant risk to a buyer that if that relationship does not continue, the loss could be devasting to the company’s overall revenue and sustainability. Unless you have some type of state or government contact that is assignable, you need to make sure you diversify both your business revenue and your supplier and vendor reliability. What would happen if your supplier went out of business or chose to sign an exclusive relationship with a competitor of yours? Again, from a buyer’s perspective, your goal is to focus on building a business that is truly a sustainable asset that can be sold with confidence.
4. Be prepared to defend your valuation — and have the due diligence documents organized and ready.
Once you’ve assembled your team (likely consisting of a CPA, transactional attorney and business broker) you’ll need to come up with a realistic fair market valuation and then begin organizing the due diligence documents to support your asking price. Many business owners can easily validate gross revenue, but you’ll need to show a detailed and organized list of variable and fixed operating expenses, cost of goods and payroll, as an example. Just as important, you’ll need to show and validate any add-backs your CPA and business broker will use to calculate SDE. Sloppy financials and poor record-keeping may be the No. 1 reason why buyers pull out of due diligence prior to closing.
5. Ask yourself: What are you going to do after you sell the business?
This is an important question you need to ask yourself. If your answer is that you’re going to relax, play golf and sip a margarita on the beach, you need to dig deeper. I can tell you from personal experience after going through this myself, as a business owner, you are highly unlikely to be satisfied selling your business and doing nothing afterward. You can only sit on the beach or golf for so long before lack of meaning and lack of accomplishment start to bore you.
As a business broker, I see this every day. Those whose entire identity is wrapped up in their business often struggle six months to a year post-closing. The business owner who has meaning and purpose outside of work and sees their business as a vehicle to help them accomplish those purposes more often thrives post-closing. Find something of meaning, value and fulfillment years before you sell. Unless you plan to be a professional margarita-sipping beach sitter, you likely need to find something else that results in real meaning and fulfillment.
Follow these five guidelines and you’ll greatly increase your chances for not only a successful exit but fulfillment and happiness after selling your business.