Even if you arent planning to sell your business today, here are some thoughts on how to prepare for the future. Its worth putting the effort in now, because building a stronger organization early on makes a sale easier and more profitable down the road. Plus, the immediate benefits are self-evident.
Three Sizes of Businesses, Three Sales Strategies: There isnt a one-size-fits-all strategy to selling your business. It is accurate, however, to look at three differently sized businesses and develop a strategy for each, because there are three distinct differences in asset value. Well look at three business models, and in an odd approach to valuation, well disregard sales and focus on the number of employees.
Heres the breakdown: The small business, with fewer than five employees; the mid-sized business, with fewer than 20 employees; and the large business, with more than 20 employees. Why are we disregarding sales figures? Because were concerned not with the absolute valuation of your business, but rather a strategy to sell it in the first place. The price that you sell your business for is a matter of your negotiating abilities. But packaging your business for sale is a strategic decision.
Above all, we will assume your business is profitable. If not, do not even think about selling now. Find a way to run it profitably or shut it down.
The Small Business:
Your business is worthless to someone other than you. So dont bother finding a way to sell it, because you wont find any qualified buyers, and any offer you receive will be insulting. Not to hurt your feelings, but small CI businesses arent an attractive buy. Why? Because chances are, you, as owner and chief salesman, have built the business around your skills. If you leave, then your skills leave, and your companys value decreases.
Instead of trying to sell your business, find a way to ease yourself out of day-to-day operations. Thats right. Start taking long vacations (call them sabbaticals, and your employees wont be as jealous). Increase the responsibilities (and compensation) of your top employees. Cross train everyone in the organization, because without you, theyre all going to have to do more workyour work. And slowly over a period of four to five years, you will find yourself not showing up but one week a month, and taking a small, but consistent salary.
Add up your salary over this five-year period, and you will find that you have given yourself a nice raisewhen computed on an hourly basisand this has been your buyout. Now you are in a position to be magnanimous, and start selling equity in your company to the employees who stepped up in your absence. Depending on your companys value, and your valuation method, you can sell your equity over another multi-year period in exchange for a monthly stipend. Now thats planning!
The Mid-Sized Business: Like the small business, you can use the easing out strategy outlined above. But since your operation most likely has a formalized management structure, you have the luxury of selling your company to the buyers who want it mostyour employees. And heres the great part: employees are willing to pay you a nifty premium for the business. This is not because theyre easily duped, but because they know more about the business than any outside investor and have a lower level of risk going into the venture. Plus, they will pay a few bucks more just to keep their jobs.
Setting the stage for a smooth transition should begin now. That means aligning your management so that you can leave without being missed. That requires a good deal of cross training for your top employees. Dont be shy. Start handing out responsibilities to all who want the work. You might not even have to increase their compensation if you let them in on the plan. Employees are tickled pink to find out they might ratchet up the status ladder from employee to owner.
Now, heres the rub. Because your top managers have no money to speak of, and cant give you the meaty buy-out that you want, you will have to trade them sweat equity for cash. So when your plan is in place, and a valuation has been established, you can summon these managers to your office, and trade them equity for a reduction in their salary. You can then take this newfound money for yourself, in addition to the salary you were already drawing. After you are all paid out, the equity gets turned over to the management group.
The Large Business: A large business may be the only one attractive to an outside buyer. Most likely, it will be an investor who wants to buy the company and step into your position. While you might think this to be a long shot, there are plenty of entrepreneurial investors with wads of cash looking to buy a fun business.
The best way to prepare for this investor is to codify and standardize each and every aspect of your business. Bring in a consultant, if necessary, to have every process, every form, every piece of paperwork refined for ease of use. Think of your company like a McDonalds franchise. The easier it is to operate and understand, the easier it is to hand it over to an outsider. You dont think McDonalds franchise owners were all chefs, do you? Of course not. Theyre investors, buying into a standardized, smooth-running process.
Making your business into a smooth, standardized operation increases its value. Heres the most interesting partin the process of streamlining your operation, you will increase your own profitability, making the sale even more lucrative. The key here is to develop a set of processes and procedures that are so intuitive, you can hand them to an outsider and they can run the business without you.
