As business owners, most of us dream about the day we walk away from the closing table with a big fat check with lots of zeroes and can officially consider ourselves "set for life."
But, we should be asking: what can we do now to put ourselves in the best position to realize that dream?
that you were looking for a business to buy. What kind of company would be attractive? It would be a stable business that makes a lot of money while you sit on the beach! Simply said, a company that for the owner is profitable, predictable and passive!
Your business doesn't have to be glamorous – the more money it makes, the more predictably it makes it, and the less it requires of you – the more valuable it will be.
Of course, there are exceptions worthy of consideration. And thinking about what unique attributes your company's buyers' might look for is important to making your business attractive.
Perhaps a competitor wants your customers, wants to “take you out” to improve their margins, or wants access to your unique products or position.
Perhaps your company's unique capabilities would complement and enhance theirs. If, for example, your potential buyer is a competitor who wants to gobble up market share, then your focus should be on growing top line revenue.
But the most universal reason people want your business is its profitability.
There are three standard methods of business valuation. The first and most basic is simple book value. What is the fair market value of your businesses assets minus its liabilities? If this is the method that yields the highest results, rather than sell your business, you may be better served to simply sell each asset of your business piece by piece when you are ready to get out.
The second method is commonly understood in the real estate market: pulling comparables. What have other businesses like yours sold for recently?
The third is calculating the net present value of your businesses’ projected future profits. In other words, how much money would an investor need to invest as a lump sum (buying any asset or business) to, given their required rate of return, produce the profits that your business is expected to produce each year going forward? Obviously, the more profit your company earns, the higher its valuation, and a positive trend of profit growth will improve its value.
Keep in mind, this calculation assumes the buyer is not working in your business like you may be, so an adjustment to profitability may need to be made to allow the new owner to hire someone at fair market wages to do your job. The profit left after paying that wage is the number used for this calculation.
Businesses often use “multiples” as rules of thumb – a company may be worth one and a half times gross revenues, three times annual profits, etc. Check with your industry’s trade association, your accountant, or a business valuation expert for guidelines for your business.
What can you do to make your business more stable, secure, and consistent? If you announced that you were selling your business, what adverse changes might that precipitate? Are there key vendor, customer, or employee relationships that are run on handshake agreements that should be formalized contractually? What can you do to build a moat around your customers, products and margins? What can you do to enhance customer loyalty and ensure business stability?
Nobody wants to buy a job if they are qualified to go get one for free. To maximize business value, you need to build the systems that enable your business to run without you. If your business is totally dependent on you, then you may have a customer list, but you don’t have a real company to sell.
A successful franchise can sell their business system for big bucks by demonstrating how well and consistently it has worked for others, even when the particular business they are proposing to the franchisee doesn't even exist yet! The most common steps here are to document your products and processes, identify each job within your business, each work process, and create a reporting system to monitor performance. Installing a capable, well-trained general manager can be a key component here.
So who will you sell your business to? Plan ahead! Give it serious thought. Identify potential buyers and understand their motivations well in advance.
A cash rich competitor, a manager or younger associate, or your own employees may be solid options.
Of course, before you sign on the line, consult your attorney, accountant, financial advisor, and other key advisors. Earn-out provisions, non-competition agreements, tax implications, and dozens of other details can all have a huge impact on your bottom line and long term satisfaction with the deal.
The funny thing about all of this is that once you take all of these steps and make your business attractive to someone else, it may become a lot more attractive to you! You've just transformed your business into what you've wished it would be. Once it's Profitable, Predictable and Passive, you may want to keep it!
David S. Coult, CFP, CLU, ChFC, QPFC is the president of Milestone Financial Associates, LLC, at 330 E. Main St., Macungie. He can be reached at email@example.com. Securities and Advisory services offered through Commonwealth Financial Network, Member FINRA/SIPC, a Registered Investment Adviser.