I’m 61 years old, I’ve been doing for this for 21 years, I’ll be ready to sell my business in four years.” So began my recent conversation with a prominent business owner in Nashville.
“Tell me what I need to do now to be ready to sell in four years.”
Several times a month I find myself in a conversation just like this. A business owner, who recognizes the value of being proactive, confronts the reality that they have work to do to get their business ready to sell.
Fortunately, with enough time, and the owner’s genuine commitment to make changes, we can almost always substantially increase the value of the business implementing this three-phase plan.
#1 Make Yourself Dispensable
While it seems counter-intuitive, the value of a business is inversely related to the importance of the owner in the daily operation of the business. A business buyer has to know that the business can sustain itself once the owner/seller is no longer in the picture. In the case of my recent conversation, the business owner admitted he was the primary “rainmaker” for the professional services firm. He has a great reputation in the Nashville business community, so it’s natural for him to be the face of the company. Moreover, meeting with new clients is what he LIKES to do, it comes natural. But I encouraged him to focus a large part of his time on finding, training and nurturing a new business development team. This sounds easy but it brings two problems, first it cost money to build a team and second, it takes time. Excess money and time is not something most business owners think they can part with. But having done or seen scores of small business transactions, I can tell you that the dispensable owner makes his/her business at least 33-50% more valuable.
#2 Diversify Your Customer Base
Look at this from the perspective of the buyer …. assume your business has $5 million in annual revenue. Would a buyer like this business more if it was five customers each generating $1,000,000 in annual revenue or 25 customers each generating $200,000 in annual revenue? Obviously, the latter situation is safer because the business is more diversified. Truthfully, I seldom see situations that are this extreme, in most cases when there’s a customer concentration issue it’s because one customer generates 55% of the annual revenue, another generates 20% and fifteen other customers generate the realigning 25%. Diversifying your customer base is like making yourself dispensable, it takes time and intention, admittedly it’s easier said than done. But know that that is a key question a buyer will ask, and if you have the right answer, your business will be worth 33-50% more.
#3 Have a Growth Strategy
I’d be living in Bora Bora luxury if I had $100 every time I heard this phrase: “all this business needs to grow is marketing.” Frankly, whenever I hear that I assume the business owner is really saying “I have no idea how to grow this business and it doesn’t generate enough cash flow for me to figure it out.” When a buyer looks at your company, he/she will want to know there is a path for growth, for new opportunity, and they will pay MORE for your company when there is a logical growth plan. Instead of saying “we need to spend more in marketing” you need to be able to say “here is my ideal customer, here is where you find them, here’s how you reach them, and here’s what makes them consider my product.” See the difference? Instead of just saying “we should market more” you need to be able to articulate the who, what, when, where and how of your potential growth. Doing this adds 25-50% more value to your business.
I will be the first to admit that saying all this is easy, doing it is hard, and takes time, money and energy. But if you bring in an experienced business broker early on in your planning process, we can help you through these enhancements.
Tennessee Valley Group
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