Keep an eye toward finish line and selling business
Joe John Duran
Joe John Duran
While the world's greatest athletes prepare to compete in the summer Olympics in Athens, many business owners will be dreaming of a different kind of victory, and will be too busy to take a summer break. The most important triumph many entrepreneurs experience is the successful sale of their business.
Unfortunately, for all of the work that entrepreneurs put into the growing of their business, many typically spend very little time preparing to sell it.
What they fail to recognize is that a great business to own is not always a great business to sell. Because of this many business owners end up simply handing their business over to a successor for a very modest price, and they leave a small fortune on the table.
It doesn't have to be that way! Some simple planning could make you a mint. After interviewing dozens of entrepreneurs in a range of industries for my book, "Start It, Sell It and Make a Mint," I found that there were three must-have keys to creating a valuable, and most importantly, a sellable business. And these are:
The single biggest factor in determining price is the size and predictability of the revenue stream. Obviously the larger the revenues, the higher the price, but it's also true that the more predictable the revenue streams, the higher the price.
Typically companies that generate recurring revenues (such as service contracts) command twice as much as commission-based businesses that have one-time customers.
It is also important to note that the higher the revenue stream, the more qualified potential buyers you will find, resulting in a higher price. So concentrate on increasing revenues in size and substance before you sell.
How to improve: Identify which of your revenue streams are predictable, and identify how to convert more of your revenue into recurring income.
For example, a yoga studio in Los Angeles went from charging a per visit fee of $15, to charging clients an annual membership fee of $1,200. The clients who came in more than seven times per month were better off, and the revenue stream became more predictable, and therefore, safer and more valuable for a future buyer.
No dependence on any one person
A common source of conflict is the immense dependence that most businesses have on one or two key employees (typically the owners). This means the buyers know that the business has very little value without the owner, and so they cannot afford to pay a premium for it.
If, however, the owners have had the foresight to prepare the business to operate in their temporary absence, then it will probably continue with their permanent absence and any potential buyer will view that as a major risk removed.
How to improve: Remember there is an inverse relationship between your importance to the business and the value of the business. When you begin thinking about selling your company, start paring back your day-to-day responsibilities by delegating some of your work to others. That might involve hiring some additional staff or promoting some of your team.
If the clients are not willing to continue doing business with a new owner, then clearly the company has very little value. Focus on building clients loyal to the business rather than to any individual within the company including the owner. The more certain a buyer is that clients will not object to new ownership, the more valuable the enterprise becomes.
How to improve: The key to having clients who remain loyal to the company is to build a strong brand. One easy way to do this is for the business owner to constantly emphasize the company and the team that supports every client rather than focusing on any one individual. After all, the new buyer will want to know that the clients belong to the business rather than to individuals.
Whether you're competing in the Olympics or running a business, preparation is as important as luck and talent. It's also the only thing that we entrepreneurs really have any control over. Those business owners who treat the selling of their business like a major event that requires serious preparation are invariably richly rewarded for their efforts.
Ready to Sell
So you've prepared your company and are ready to sell. Here are the steps to take next:
*Get an objective outside appraisal of your business value before you start.
*Build a large group of potential buyers through business brokers, industry conferences and online research. A good rule of thumb to remember: the larger your revenues, the larger your group of potential buyers.
*Get outside help for the negotiation. Have someone who has been through a sale to consult with, whether it's a friend a lawyer or an accountant. Experience is immensely valuable in the negotiating process, and having someone knowledgeable to speak with will be invaluable.
*Don't ignore the details, and do keep a sense of humor. When the negotiations start in earnest, make sure to keep the atmosphere light especially at crucial moments. It can be the difference between success and failure.
Joe John Duran is a chartered financial analyst, a successful entrepreneur and the author of "Start it Sell it & Make a Mint." He can be reached at www.startitsellit.com.