So, You Want to Sell Your Business?
Nov 28, 2019
It really doesn’t matter what your business is or how large it is, at some point you will exit your business. If you’ve invested in the right areas of your business, there is someone who will pay you a lot of money for your business. Unfortunately, many small business owners haven’t a clue on how to create a sell-able business. It just so happens, I created my last business, Ennovate Corporation to sell and I sold it in 2013. If you want to sell your business, please read on.
Nine Ways to Leave a Business
There are nine ways you can exit your business:
- death or disability - hope someone takes it over;
- death or disability - have a buy/sell agreement in place to continue the business and provide for your family;
- sell to family member or employee with debt to buy the business;
- sell the assets of the business
- strategic sale
- financial sale to a stranger
- sell to investors (public – IPO; or private)
- file for bankruptcy protection
- close the doors and dissolve
I’m sure I’ve missed a few, but essentially any one of these nine will happen to you if you’re a business owner. Sadly, many business owners are planning for #9. If that’s you, you’re missing out on a major financial opportunity that can fund your retirement or philanthropy desires for many years.
Targeting a Strategic Business Sale
While any of the other options will certainly allow you to exit, a strategic sale is by far preferred by the seller of a business. A strategic sale will yield much more revenue for the seller than any of the other options described in the nine ways to exit.
What is a financial sale?
A financial sale of a company is based purely on financial valuation. Small businesses are valued differently in different industries. If you were to buy a stock of a publicly traded company on the stock market, you will most likely pay 20X earnings for that stock. That means that the publicly traded company is financially valued at twenty times its profits. This is known as a multiple. If a company is making $1 Million in net profit, then that company is worth $20 Million (20 X $1 Million). In the private small business space, companies are not valued so liberally. In a financial sale, you can expect to get paid 2.5 times your annual earnings. That same company earning $1 Million per year will net $2.5 Million in a financial sale to a seller (before capital gains taxes).
Why target a strategic sale?
A strategic sale of a company is not limited by the financial performance of that company. One needs to look no further than Amazon. Amazon is a publicly traded large company that was losing hundreds of thousands of dollars on an annual basis from 1998 to 2004. And yet, share-holders were very willing to continue to invest in this company. Why? Because they saw the strategic value that Amazon played in its future business.
As a small business owner, your strategic value is a little different. In many cases, small business owners are oblivious to the strategic value they offer a buyer until an offer is made. Here are the basic strategic positions you can create for your small business, if you want to sell it someday:
- patents and copyrights;
- customer networks;
- niche market;
- geographic domination;
- talented people and management;
- scalable business model;
- bolt-on capability;
- record-breaking systems & processes
As I’ve said above, strategic reasons can be from anywhere, but these eight are the most common. In most cases, a buyer is looking for several of these to offer a higher price than your company is worth in a financial sale.
How to Position Your Service Company for a Strategic Sale
I could write an entire textbook on selling businesses, but I want to narrow this blog post into a single niche of service-based businesses. I think serviced-based businesses are the most overlooked value entrepreneurs. And the least prepared for a strategic sale. If you’re a service-based business owner, here’s your checklist of things you must consider, if you want to sell your business in a money-making strategic sale someday.
- Get Out of Your Business. If you’re a plumber, you will start a plumbing business. If you’re an engineer, you’ll start an engineering business. If you’re a lawyer, you’ll start a law practice. If you entrench yourself in your business, it is unlikely you’ll be able to exit without becoming an employee of the buyer of your business. This means that you must find a way to extract yourself 100% from the operation of your business in order to sell it… financially or strategically.
- Productize Your Business. There are three ways to create products out of a service business: 1) lock in systems and processes that anyone can follow; 2) create products that are integrated tightly with your services; and 3) create bundled service packages that offer superior value to individual services.
- Protect Intellectual Property. Intellectual property includes trademarks, copyrights, patents, software licenses and any other stamp that claims a thing as being owned by your company. Intellectual property is critical to protect the items you’ve created in #2. Errors I’ve witnessed with many small business owners is that the try to protect things that don’t really matter; and forget to protect the strategic value they have created. The best exercise you can do for yourself to know if you ought to protect something is to ask, “If I were in negotiations to sell my company, could the buyer simply do what I do without paying me for all the effort my employees put into creating that thing?” Use your common sense and hire an Intellectual Property attorney, if you’re in doubt.
- Customers are King. You certainly don’t own your customers. But the relationships and momentum that you’ve developed with your customers over the years is quite valuable to an acquiring company in a strategic sale. In fact, many companies may purchase your company, just to market the rest of their products and services to your customers. This is a huge shortcut to trying to acquire a new customer for themselves.
- Niche Markets. You’ve probably heard from several marketing consultants, “the riches are in the niches”. It’s true. A “niche” can be a customer segment, a unique product or service, a unique way of delivering your service, or innovative processes you’ve created.
- Complementary Services. A key to a strategic sale is to add some small element that you’ve mastered in your small business that a large company has completely overlooked. Large companies are growing so fast they often overlook items that they can instantly scale. These are often called “bolt-on” services. Let’s say that you are a mechanical design firm and the buyer is an electrical design firm. They know that if they acquire you, they can get more contracts from large architects who are trying to hire Mechanical/Electrical design firms.
- Redundancies will be Eliminated. The more that you look like the company who is buying you, the less attractive you may appear in a strategic sale. When I sold my company, Ennovate, I sold it to a company that would have been considered a competitor. While they did a lot of what we did there were other reasons the sale was strategic. Mostly, geographic and customer factored into our sale. If you have administrators or others who are redundant parts of the acquisition from the buyer, you may lose those folks in the sale of your company, but they will also not be counted as expenses that the buying company will inherit.
- Financial Recasting. Most small business owners classify expenses as business expenses that will not be considered business expenses by the buyer of your company. It is important for you to understand what expenses will be inherited by the buying company and take them out of your profit and loss statement when you are talking to a prospective buyer. This is good advice whether your sale will be financial or strategic. In fact, if it is a financial sale, this will be much more important as your company’s value will be purely financial.
- Negative Strategic Value. When I sold my company, Ennovate Corporation, we provided peak load engineering services for several large companies when they encountered large projects. I knew that when Ennovate was sold to a competitor of our engineering outsourcing customers, we would lose those contracts… and so did the buyer. This revenue and profit were taken out of the valuation consideration by the buyer as a value of our company. As was predicted, after the acquisition, these competitors dropped our contracts as fast as possible.
- Buyer’s Mindset. In order for you to prepare your business for a strategic sale, it is important for you to think about who may buy your company at some future time; and position your company for sale. Be fully aware of what a buyer will value, and what a buyer will feel is of no value to them. When the time is right, you may even start acquisition discussions with the buyer because you are in tune with what that buyer wants. You will extract yourself from day-to-day operations and will create the value that buyers are looking for.
If you want a more comprehensive checklist, I advise that you visit a business broker or business valuation consultant. There are an infinite amount of variables that will be important to an infinite amount of strategic buyers.
How Can a Business Coach Help?
Probably 10% of the business coaching universe understands what I have talked about in this blog post and hasn’t gone through a sale or acquisition of a small business. I have. The largest obstacle to selling a company is #1 on the checklist above… “Getting out of your business”. Most owners of service-based companies started out as a sole-proprietor, then hired a few administrators, eventually partnered with or hired other professionals, and can’t seem to extract themselves from their business. They are busy trying to create profit and even when they’ve created income for themselves and their employees, they struggle with creating value that will survive them.
Some will feel trapped in their business. Others will feel complacent. Still others feel apathy toward creating anything more than what they have today. If that’s you, then you don’t need to waste your money hiring a consultant or a business coach.
- want to create lasting value in your business;
- want to extract yourself from day-to-day operations, but don’t know how;
- need to spend more time with family while your business is growing; or
- want to move on to bigger and better adventures,
then I can help you craft a plan to do all these things. If you want to talk this over with an experienced business veteran and sell your business someday, I’d love to help you map out a plan. Schedule a free Discovery Session with me to see how we can do this together.