Preparing Your Business for Sale
I spoke with a gentleman recently who had been in business for about 2 years. He had done all of the right things to get his company on the plus side of the ledger. His sales were increasing at about 200% year over year. His employees were well trained and loyal, and he had a good program in place to measure customer satisfaction. He had a great business plan, which supported his vision of being a $5,000,000 company in 5 years. His stated goal was to position the company for sale at that time.
I was very impressed with everything he had done up to this point to create a great company with an excellent reputation. So, I asked the most important question of the meeting, "Can you go away for a month or two, return, and find the business running as smoothly or better than when you were here?" His answer was, "No, I can't even leave for a couple of days." I asked if he was doing anything to remove himself from the business. "Not yet," he replied, "I have not had time to think about it, and besides, it will take a personality change for me to not want to be involved with every customer."
So, here in lies the problem that will prevent this successful entrepreneur from reaching his goal of $5 million five years from now. There is no way he can continue being involved in every transaction, while experiencing revenues of that magnitude. There just isn't enough time in his day to do this.
Unfortunately, great entrepreneurs start out very well with a lot of momentum. They then reach a point where they either stop growing because they cannot remove themselves from the company, or quality begins to fall because they are stretching themselves too thin and cannot spend the necessary time with each customer to insure satisfaction. Either way, the objective is compromised.
Another underlying problem that will reduce the value of the company when it is time to sell is "Goodwill". Goodwill is the subjective value of the company based upon why people buy, how much repeat business the company generates, how referrals are made, etc. The higher the goodwill value of the company the more the business owner can tack on to the selling price above the stated value of the financials.
Many times the owner carries all of the goodwill for the company. The owner is the one that has made the relationships with the customer, has been the one to resolve the problems as they came up, and carries the reputation for which the company is known.
I have had many owners tell me that they expected to stay on with the company for a year or so after the sale so as to make a smooth transition to the new owner. This seems like a reasonable approach to transferring their goodwill. Unfortunately, this is the worst thing you can plan on doing if you want maximum price for the company. The way to get the most out of the sale is to insure that the entire amount of goodwill is positioned squarely with the company and not with an individual, especially not the owner.
So how do you solve these two problems and obtain maximum value in a sale?
Problem 1: Not getting out of the way and letting the business grow.
Problem 2: Insuring that all of the company's goodwill belongs to the business and not an individual.
Both of these problems are solved in the same way. It is important that procedures are clearly defined and systems are put in place that will cause the company to run automatically. Every aspect of your business needs to be considered, from the initial marketing that will attract the customer right through to the point where the customer has bought your product/service and is positioned to buy again, be a reference, and most importantly, refer other business to you.
The internals of your company need to have strong systems in place, as well. Maintenance of equipment, payroll and benefits to the employees, record keeping, customer service processes, warranty claims, hiring policies, and many other things all need to be put on "Automatic".
The business owner must face the fact that this objective cannot be achieved without three things.
- Commitment
- Knowledge
- Help
Commitment by the owner can be difficult. This requires owners to reevaluate their personality, level of involvement, and willingness to relinquish control. Entrepreneurs by nature are hands on people. They want to be involved and probably started the business because they wanted to have more control of the product or service. Making a commitment to allow the business to grow into something larger than a start up can be gut wrenching at best.
Knowledge is also very elusive for the business owner. Generally, business owners know an awful lot about the specific product or service they are providing, but very little about the intricacies of the rest of the business. Where do you begin in this process? How do you go about identifying all of the areas needing systems? How do you implement the system to insure minimal disruption of the business? These questions are only the beginning of the puzzle. Making a mistake in this process could slow the growth process, prevent the owner from achieving the goal, or worse, set the groundwork for failure.
Ego prevents business owners from asking for help. After all, the business owners have made it this far without help, why should they admit that they are not capable of taking it to the end? I suggest that no one became a success in his or her endeavor without help. Tiger Woods, one of golf's greatest players, has a coach, Michael Jordan undoubtedly one of a basketball's preeminent super stars, has a coach, Bill Gates, the world's richest entrepreneur, surrounds himself with advisors, and the business owner that wants to achieve this type of goal needs one too.
A good business advisor can make the difference between steady growth and stagnation, showing the business owner how to work on the business and not in the business, setting the groundwork for success and avoiding the pitfalls, getting a good price for you business instead of taking what ever is offered. A good business advisor will not cost you money but will ultimately deliver more to your bottom line than you spend. A good business advisor will be trustworthy, ethical, and brutally honest with you. A good business advisor will not take control of your business but simply point you in the right direction. A good business advisor will not pretend to be all knowing but will have a support network around him/her that can be used to address any business issue.
If you want to get your company running on "Automatic" by putting procedures and systems in place to insure success, consider the services of a business advisor. It may be the best investment you will ever make in your company.
To Your Success -
