Here are 5 critical success factors you should be building into your planning right now.
Businesses do not typically sell by accident. The owners that end up selling their business for a significant amount of money have usually been preparing for that day for some time. You don’t have to be thinking about selling your business any time soon to start planning now for the day when you might want to. If you consider the following five things, you will be in good shape when the big day finally arrives.
1) Set your end goal.
Think about how much you might want to sell it for and by when, and work backwards. Here’s a tool to help you work this out.
2) Name your buyer.
It’s important to have a good idea about who might want to buy your business in your early planning. Imagine spending 10 years building a business you intend to sell, only to realise you have created something nobody wants to buy. If you build a business with a buyer in mind, you have a much better chance of building something they really want.
A potential buyer could be a larger player in your industry looking to grow through acquisition. This growth might be regional – they want a presence in your city or town and it’s easier to buy you than start from scratch.
It might be strategic – you have a smart product or service they could add to their existing infrastructure to create additional revenue streams. An example of this might be a large accounting firm buying a small bookkeeping firm to add value to their client base.
Your service or product could become a ‘nuisance’ to a competitor and they buy your company to prevent it competing, or to regain lost revenues.
It could be a management buy-out, when senior employees raise the funds to buy you out. It could be a competitor of a similar size wanting to grow and willing to invest to gain rapid growth through acquisition.
I’ve sold businesses to two types of buyer. A multinational bought my advertising agency, and a local competitor bought my pet care company. My father’s photocopier business sold to his senior management team. A good friend has built three recruitment agencies. The first sold to one of the original partners, who bought out the other partners. The second sold to a multinational looking for regional representation in her city. The third is in its early days of growth and I’ll watch with interest who buys it (I have no doubt it will sell, because I know the founders expect this and will build with this in mind).
Another type of buyer could be a private equity group or even an individual who sees great potential in what you’ve built. So who might want to buy your business? What are you building that could add huge value to someone’s offering? Now is the time to start thinking about these things.
3) Remove the dependence on you.
To make your business attractive to your future buyer, it cannot be dependent on you. This is a key message every business owner should remember: no one will outright buy a business that’s dependent on its owner.
If the buyer takes you out of the picture and no business remains, they will either insist you stay in the business, or they will walk away. So whatever your strategy is, whatever your end goal, whatever that picture is, it needs to not have you in it. I did that at my agency by making sure the clients loved the business but weren’t dependent on me. In the last few years, I hired two senior guys and put them in charge of our biggest clients, so my buyer could see the clients were not reliant on me.
4) Start building a team as soon as you can.
I couldn’t afford to bring in those big guns until later in my business growth. I started by hiring people I could afford, with a couple of youngsters straight from college. I trained them to do things exactly the way I wanted. I call it ‘training your clones’. I kept building my team that way until we could afford to hire more senior people. And then we had to make sure we had a really strong culture to manage senior people.
5) Secure future earnings.
Getting all our key clients on fixed-term contracts was another critical strategy that worked.
They all had two or three year contracts, so when the buyer looked at my business they saw a high level of spend committed for the next three years.
This was an important lesson I learned from my businessman father. One of the best secrets to success he shared with me was, ‘you’ve got to have a back end.’ To explain, he gave the example of his own business. While the sale or lease of each copier was worth a lot of money (especially in the 1970s when these huge machines were a relatively new addition to business productivity), the real value came from the additional contract that went with each machine. This locked the customer into buying all their ink, toner and paper for the life of the machine, as well as regular paid servicing – which meant that, for every machine sold, my father had income guaranteed for the next 10 years, enabling him to predict his future income with complete accuracy.
You can see why this made my father’s business attractive for a buyer. They could see a guaranteed return on their investment. It made sense to me when I started my own business, and I hope it does to you too. It will get you a higher price when you come to sell.
A business with committed future revenue that is not dependent on its owner to deliver that revenue is a business worth investing in. I hope these five things have given you something to consider as you build your valuable and saleable business. Good luck!