Selling Your Business — 3 Preparation Steps That Will Make Your Business More Valuable
In the world of buying and selling small businesses there exists an unfortunate situation.
It is almost a cliche these days to see articles about selling a business that say things like, “ to sell your business you must start to prepare at least two years in advance”. The author will then list the things you must do to get your business ready. Activities such as “increase sales” or “cut costs” or “get your financial statements in order”.
It is as if good business practices only come into play once you’ve decided to sell.
Wouldn’t you agree that cutting costs, increasing sales and having organized financial statements are important even if you are not selling your business?
A business that consistently grows sales, cuts cost and has its finances in order seems like a great business to own.
Why would you wait until you want to sell to build that type of successful business?
Stop Preparing And Start Building
The best way to “prepare” your business for sale is to build a business worth buying. Of better yet, a business worth owning. If your business is not providing you with a nice income it is going to be hard to sell it. Especially yours is a smaller, owner-operated business. The only reason an individual will want to buy the business is for the earnings it provides for its owner.
The statistics on selling a small business are discouraging at best. In his book “The Complete Guide To Business Brokerage” Tom West states that a successful brokerage will need 5–6 listings to generate one sale. In my 15 years of working on the for-sale-by-owner side I can tell you the success rate is about the same for those who sell their business on their own: about 1 in 5 businesses put up for sale actually get sold.
And the reason for this low success rate has nothing to do with preparation. It isn’t that owners don’t do the right things once they decide to sell.
If getting your books in order and hiring an accountant to help with valuation where all that was needed, every business would get sold because every business owner completes these obvious steps.
Here is the thing that is missing from most discussions about selling small businesses: The Buyer.
Ask yourself this: why would a buyer give you the amount of money you are asking in exchange for owning your business? Does your business — at this moment — generate enough earnings to make it a smart investment for the buyer.
Sellers are usually so focused on their wants and their dreams of an easy retirement that they often treat the buyer as an afterthought.
Would You Give Your Life Saving To Own A Business Like Yours?
Two things must happen for a buyer to invest in your business:
1.) They must have a reasonable expectation that they can maintain your level of success once you are gone.
2.) They must view your business as being a better investment than all their other options.
Let’s focus for now on item number one: the buyer must have some reason to believe they can continue your level of success once you are gone. The reason this is such a big problem is that many small businesses are totally dependent on their owner for their survival.
To sell your business you must create an organization that can exist separately from you.
For most small businesses these three steps will be the most effective ways to do that.
1.) Remove Yourself From The Sales Department
If you started as a one-man show then chances are you are a good salesperson. Early on that was probably necessary.
But now you want to move on.
And no buyer wants to own a business where all the customers are doing business with the owner for personal reasons. The buyer will ask: what is to stop these customers from leaving when the founder leaves?
Founders and entrepreneurs can be great, passionate sales people. If that is true for you then when I buy your business I just lost my best salesperson.
And worse yet are those cases where the owner is the only salesperson.
This is especially dangerous in small service businesses like web design, graphic design, real estate inspections and the like. It is common in these types of businesses for the owner/founder to also be the only salesperson.
If most of your new business comes to you because of your own personal sales efforts, then anyone who buys your business is actually buying a sales job, not a company.
Businesses that are nothing more than a self-employed person have little to sell except a customer list and maybe some training.
Worse still, I may fear that customers were doing business with you personally, not the business I am about to buy.
Your job as an entrepreneur is to build the business, not make individual sales.
So to maximize the value of your business develop a sales and marketing operation that doesn’t depend on your daily efforts.
If you are in fact a one-person operation and you are ready to sell now, that is still okay. You an still sell your business. Just realize that the buyer will be receiving less in the way of tangible assets and will be taking on more risk. They will value (and price) your business accordingly.
2.) As Much As Possible, Remove Yourself From The Rest Of The Business Too
Now that you have fired yourself from the sales department, fire yourself a few more times.
If the Standard Operating Procedure at your business is that you handle every crisis and you put out every fire; who will do that thankless work once you are gone?
Most likely the new owner. In fact it will have to be the new owner because his new employees don’t have any experience or expertise handling problems — you were always the one handling them in the past.
Who wants to buy into that situation?
If you are the chief cook and bottle washer who will do those odd jobs when you’re gone?
One very simple thing you can do is give your employees more freedom to solve their own problems. The next time an employee comes to you with a problem don’t immediately go to work fixing it for them.
Instead, ask them how they would solve this issue if they owned the company. If they give you a solid answer you can then let them go ahead and implement that solution. If that is not possible at least you have got them in the habit of thinking about solutions on their own.
3.) Start To Put Into Writing Everything That Works ………. And Everything That Doesn’t
I originally titled this section “Have A Set Of Written Policies And Procedures”. But that sounds really hard to do. And really boring.
The reality is that few small businesses have the time to create a detailed policies and procedures manual. And I am not suggested you create some dense, monotonous manual that dictates how every single activity be done.
But it would be of great value to a buyer to have a written record of what has worked.
You probably use the same key words and phrases when prospecting for customers or closing a sale. You probably ask the same questions of applicants when hiring new employees.
Put that sales script down on paper. List the interview questions that you have learned are the most effective and informative.
It has taken you years to learn what works and what doesn’t. Take everything you know about running your business that is in your head and put it down on paper. This is the value the buyer is paying for.
And it is of great value to you also. Remember, you can only sell your business if the buyer believes in his mind that he has a reasonable chance to continue your success.
Franchise companies are the masters at selling businesses. As an industry, their success rate is inspiring. And one reason they can sell so many businesses — and do it at a premium price — is that they document all the steps to success.
To whatever extent you can, you should put your formula for success on paper too. It will set you apart from the millions of other small business that are for sale.
No one wants to pay you their life saving so they can learn by trial and error. If they wanted to do that they would just start their own business from scratch.
What questions do you have about selling your business? Visit “Selling A Business Resource Page” Over 100 unique pieces of content to help you prepare, value and market your small business.
Originally published at www.thebizseller.com.