Creating Value
Are you getting the most out of your business?
Many business owners have a dream of selling their business some day. But many of those businesses will never be sold. You can see this simply by reviewing the number of businesses listed for sale each month on the website BizBuySell.com.
If you look at the site, you’ll see it offers listings for about 30,000 businesses at any one time. But according to BizBuySell’s recent Insight Report, there have been 1,650 to 1,890 transactions closed per quarter over the last five quarters. This means that only about 4 or 5 percent of the businesses listed on the site are being sold in any one quarter.
And that means that a lot of business owners are struggling to find a buyer who’s willing to pay anything close to asking price. If you are one of these struggling owners, you might want to consider the following questions.
What’s your revenue model?
Brokers tell me that businesses that don’t have a model that produces recurring revenue are much more difficult to sell than those that do. The best models are those with contracts in force. The second best are those that have systems in place to create recurring revenue.
One of my clients provides security systems for businesses and homes. Under normal circumstances you might think that the sale and installation part of the business would have no recurring revenue. But the company has developed a methodology of revisiting all customers with systems that are eight years old. This gives it an opportunity to review the system and make suggestions. The review process has created a recurring revenue stream.
When I sold my vending business I had contracts in place with all of our major accounts. The buyer had a reasonable expectation that those sales would continue.
Are you a passive owner?
The second reason many small businesses are never sold is that the owner continues to be the sole reason the business exists. If the owner leaves, there will be no business.
This is especially common in my current industry of wealth management. Clients come to depend on their advisers. When advisers leave, their clients often leave with them. In reality, the clients are not the customers of the business; they are customers of the adviser. Alternatively, if the adviser develops a team that services the firm’s clients, there is a higher probability that someone will want to buy the business.
The goal is to be a passive owner, one who is not essential to the day-to-day operation of the business. Not only do passive owners have a better chance of selling their businesses when they want to, they also have more options of how to run the business while they still own it.
Who is the right buyer for your business?
If you want to sell a business, you need to think about who exactly is going to buy it. In many cases, the most likely buyer may be a competitor.
I spoke recently with a local business broker about a specific listing he had, and I recommended a few potential buyers. All of them were competitors. A few weeks later I got an email from the broker thanking me for my time and letting me know that his seller didn’t want to talk to his competitors. He was hoping to sell the company to someone who is not in the business. There’s always a chance this will happen. At the same time, there’s also a chance the seller will be left with little choice but to close the business.
Perhaps the seller feared the competitor would steal valuable information and use that information to compete. I faced this situation when I sold my vending business. Instead of providing customer names to a competitor who was also a potential buyer, I offered full customer information but with the locations and names blocked out.
While your profit-and-loss statement is unlikely to provide any information that would be useful to a competitor, owners do have other information that could cause serious damage if it fell into the wrong hands. You and your advisers need to figure out which information is sensitive and find a way to protect it, while also providing all of the information needed by potential buyers, competitors or not.
At least, that’s what you do if you really want to sell your business.
What do you do if you really can’t sell your business?
If you’ve listed your business, and no one wants to buy it, you have only a few choices. You can address the issues that caused potential buyers to walk away. You can keep running the business yourself. Or you can close the business.
For many businesses, it’s surprisingly easy to create recurring revenue and take the owner out of the day-to-day operations. You do have to change the way you manage the business, and you do have to learn to trust your employees. More than likely, you will have to start allowing mistakes to happen.
But if you can stomach those changes, there’s a good chance you’ll mange to sell your business.
Have you had experience selling a business? Did you have to make changes before it could be sold?
Josh Patrick is a founder and principal at Stage 2 Planning Partners, where he works with private business owners to create personal and business value.