The real test of business success is to see the value others place on your business. That is, how much they are prepared to pay you to own it. However, few owners see the return on their money and time spent building their business when they try to sell it.
Someone buying a business has similar considerations to someone buying a home. If the home is new or well maintained, and little expenditure is necessary to make it they way they want before moving in, the buyer will pay more. If the house is run down, and requires substantial renovation, they will insist on paying much less. Taking the analogy further, if buying a vacant block, they will have to also budget for the house to be built.
When buying a business, the comparison is between taking over a going concern, building up a run down business or starting a new business from scratch. Buyers will consider the saving in time and effort through buying a going concern that provides predictable incomes and operates smoothly when compared with one that has been managed poorly, or the effort of creating a new business.
Unfortunately, most businesses are totally dependent on their owners. When they aren’t there, nothing happens or sales drop. When a buyer looks at such a business, they will value it on its physical assets and its existing customer base. The value of the customer base may be heavily discounted if it is believed that the customers have a strong personal connection with the owner. Little or no value will be placed on the future growth potential of the business as the owner has basically done nothing to tap it. Why should a buyer pay for value that the current owner has missed. The buyer must put in the effort to unlock that potential and take all the risk if they are to be a success. They will also discount the value where it is possible key staff may leave soon after the existing owner. If there are no systems, all they are really buying is a customer list of dubious value, plus a few used assets.
Compare how a buyer values a well managed business. Along with the assets and the existing customer value, the buyer will see a marketing system which has allowed the existing owner to grow their business. They may see year on year growth in sales and profit. They will see systems in all areas of the business so if staff leave, they can bring in new staff and train them to run the business in the same way. The buyer in this case may pay 3 or 4 or even more times the annual profit of the business in addition to its other assets. (Highly successful listed companies sell for 20 times their annual earnings or more).
The difference between these two scenarios is business systems that ensure that the business runs smoothly, that there is a marketing strategy that provides predictable sales growth and systems that manage the people within the business. These systems make the success of the business independent of ownership. Whenever risk is reduced, price can be increased. The time to put in these systems is not when you are trying to sell the business. You can’t fatten a pig on market day, as one politician is regularly quoted as saying. These systems should be put in place now. They are part of your Exit Strategy.
The best time to prepare your exit strategy is when you start your business, but it is never too late.
Find out more about these strategies at:
This book, which has a forward from Tony Steven, the CEO of COSBOA, the peak small business organisation in Australia, comes with a $100 of business tools, and provides an easy to understand, step-by-step approach on how to improve your business, starting with your goals, right through to systems and sales.
Please visit Five Pillars for more information on “The Five Pillars of Guaranteed Business Success”
May Your Business be as You Plan It!
Over to You. What do You Think? Post Your Comments Below.
Dr Greg Chapman is the Director of Empower Business Solutions and The Australian Business Coaching Club and is Australia's Leading Advisor on Emerging Businesses and provides Coaching and Consulting advice to Australian Small Business Owners in Marketing & Business Strategies Planning & Systems.
The Australian Small Business Blog