A business should do more than provide the owner with a livelihood. In addition to fulfilling the owner’s passion it needs to achieve such value that the owner can sell it at exit time for a price that reflects the time and effort invested. After putting in 20, 30 or 40 years the business should be sold for enough to provide a comfortable retirement for the exiting owner. If not, then all the business did was to provide the owner with a job. Building a business should factor in an exit plan and converting into cash the value built up over the years.

At exit time because of age, lifestyle changes, and financial needs, business owners want to realize the value locked up in their business. Too often the offers they receive do not meet their expectations. This is a situation that could have been avoided.

The investment made in building a business over a generation is frequently several million dollars, and too often it cannot be sold quickly. So, to arrange for a quick sale, and to obtain a fair price much preparation should have been made over the years. The guide to such preparation will be further discussed in a later section but there are four criteria that need to be met to obtain a quick sale and a high price.

 

  1. Sell when business is good
  2. Show prospective buyers a business that shows recent and steady growth in value
  3. Demonstrate high earnings especially in recent years
  4. Create a successful business model

 

Sell when Business is Good

Business conditions for a good sale are favourable when:

  • Interest rates are low
  • Consumer demand for the product is high
  • There are more buyers of our type of business than there are sellers

 

Create a business that shows recent and steady growth in value

Grow the value of the business by demonstrating the following:

  • The business must show growing revenues
  • The return on assets invested (ROA) should be attractive.
  • The gross margins must reflect or surpass industry benchmarks.
  • The payments made to the owners over the years should be generous.
  • The net income retained in the business after payments to owners should be high.

All the above require planning, a solid team, the ability to execute plans well, and not simply “managing by the seat of the pants”.

Managing for growth is not a trivial undertaking. It requires financial, managerial, marketing, and visionary skills. It means much more than having the ability to make the product or deliver the service.

 

Achieve high earnings

Earnings should not be less than the industry benchmarks.

Lower earnings than industry average, imply poor management, inadequate vision and weak execution.

Low earnings will reduce the offered price by a buyer and place financial pressure on the seller. Low earnings are not remedied by continuing to operate as before. Creating strong earnings is like creating a strong sports team. The owner needs deep pockets to attract star players, competent management, and coaching staff. The owner then needs to provide the vision and the mission for the team, and finally, to get out of their way.

If the earnings are satisfactory then one can assume that the owner is running the business properly. However, for a non-performing business the owner should seriously consider transferring day to day responsibilities to better qualified people. There is no reason why the owner who started the business and who loves the day to day work is also best qualified to run a successful business operation when the facts indicate otherwise. For most owners this can be a very challenging decision, and removing oneself from day to day operations can be a heartbreaker. Then again, so is the lack of success. In these situations, owners can best stand back and learn from those they hired.

 

Create a Successful Business Model

Lack of growth and weak earnings are not always due to poor management.

Sometimes poor performance occurs despite good operating management and is the result of a bad business model.

A business model does two things. First, it describes what markets we wish to serve and why those markets are under served. Secondly, the model describes our value proposition and why it will be profitable. It makes the business case for going into that business.

In other words, a business model makes clear that markets need our offerings and that we can make money from them.

For instance, an already well served market may not need us. Does the area need another similar business? For instance, another dentist, plumber winery?

Similarly, an unattractive market that is not able to purchase our products will not provide a good return on our investment.

 

Ideally, we wish to serve an under served market that will find our value proposition very attractive.

Too often a business will enter a market that’s already well served without providing  a value proposition attractive to that market. A market that’s attractive but well served will lead to a surplus of sellers which results in lower prices for the seller and lower earnings.

An under served and non-profitable market may offer subsistence living because of a lack of competition. This type of market will never make us rich. There will be no growth and no high returns.

 

Having a successful model makes our business attractive at time of sale and will bring a better price.

Get your own self assessment of readiness to exit the business