The voice on the phone sounded eager for some help. “I heard that you people can help a guy like me do what it takes to sell his business and get a good deal,” he said. “I’m wondering what you can do for me.”
“Sure thing,” I said. “Tell me a little bit about yourself and what you do.”
Burt was ready to retire. He wanted to sell his business as soon as possible to get going on with whatever was next in life. As he described his situation, it was clear that he operated the company for years so that it provided him and his family with a decent living. But I was concerned that he had more of a glorified job than a real business. I needed more information and offered to do a financial overview for him.
“Well, let me tell you, I can’t be filling out 30 pages of questions,” Burt said. “I can’t find enough hours in the day as it is.”
“I’ll walk you through it when you come in,” I said. “I’ll send you a short questionnaire, just a few pages, to see where you stand.” We arranged for him to come in with his wife the following Tuesday. “We’ll talk about what your life will be like after you retire,” I told him, “and we’ll try to get a realistic picture of what the company could be worth.”
I called him back after the weekend to see whether he was making headway on the questionnaire and to confirm the next day’s appointment. “Didn’t you get my email?” he asked. I hadn’t. “I can’t come in. I’m just so busy; too much to do. I wish I could get away, but I can’t.” It is a common theme. Business owners get too busy to think deeply or plan effectively.
He figured his business must be worth something, but he was too busy to get a rough idea of whether that would be enough for retirement. He could not spare even an hour and a half to discuss a strategy to build a business that somebody else might want to buy. How did he expect to sell it?
Why so few businesses sell
If you are pinning your hopes on the prospect of selling your business quickly when the time comes, consider this: only about 30 percent of small businesses that go to market will find a buyer. It is an alarming statistic for business owners hoping to cash in on their life’s work. Most of the time, their efforts will lead nowhere.
Why do most small businesses fail to sell? One big reason is that the owner often has an unrealistic sense of how much the company is worth. After obtaining a professional valuation, owners are often incredulous, even indignant — it must be worth more!
This is true even for owners who firmly believe they have a good idea of the value of their business based on what some other company sold for or maybe some overly-simple heuristic. Or they think that since they have devoted 30 years to the place, it must be worth more. But time devoted does not translate into value to a buyer.
The owner enters the market with high expectations, insisting on a price that drives many buyers away.
Taking care of your baby
Your business is your baby, and you want to take good care of it so that it grows up strong to take good care of you someday.
The better you tend to your business, the more you can build your income. Ultimately, companies are valued by how much income they can predictably generate. The value of a company typically will be a multiple of what is known as its EBITDA, which stands for “earnings before interest, tax, depreciation and amortization.”
In other words: How much cash flow is your company generating? The most valuable companies produce an income that can be transferred to new owners. That is what piques the interest of buyers.
Think about it from the perspective of an outsider considering whether to purchase your business. Prospective buyers will want to know that you are earning a high income and have the time to get away and enjoy life. They want to see that you stand confidently at the helm of a well-run operation, guiding it to ever-better profits.
If instead, you are laboring away at a job, like Burt, and your life is a swirl of hard work, the prospective buyers will value your business accordingly. Why would they want your headaches? They don’t want your job; they want a business.
Even if you want to run your business forever and don’t intend to sell it, you should operate it as you intend to. Your business should be more than your piggy bank. You must not shake out so much income from it that its operations suffer. Maximizing your personal income does not necessarily drive business value; however, maximizing business value certainly will drive personal income.
The initiatives you take to grow your business will inherently involve a degree of risk because you will not always be sure that they will work out. Your business likely is your biggest asset. Taking care of it not only means encouraging its growth but also protecting it from various dangers.
A prospective buyer will be looking to see whether you have attended to those threats and have the necessary insurance, contracts and legal agreements in place to deal with all those contingencies. This is called “de-risking” the business — protecting your baby from harm — and it directly influences how much a buyer will pay.
Nobody wants to acquire potential troubles. Headaches will translate into a lower income and sale price.