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Run Your Business Like You Have To Sell It
By Richard Parker, President of The Business
For Sale Buyer Resource Center™ and author of
the most widely used reference resource and
strategy guide for buying a business for sale –
How To Buy A Good Business At A Great Price©
Author's note: While this
article was written mostly for business owners,
you will learn some of the pitfalls and warning
signs to look out for with businesses you may
consider purchasing. As well, it will provide
you with some benchmarks to evaluate how to
implement these suggestions once you own the
business.
Industry statistics indicate that the average
small business changes hands every five years or
so. If you're thinking about buying a business,
or own one now, the day will come (faster than
you think), when you'll want to sell.
By positioning your business to operate in a
certain manner staring today, you'll not only
sell it for more, you'll actually make more
money between now and then.
The key to selling anything is to make it
easy for someone to buy. This is especially true
when it comes to a business. There are certain
things that have an enormous impact upon the
eventual price you will obtain.
A Problem Later Is a Problem Now
If there's something in your business that
would turn off a potential buyer, chances are
it's also hurting your business today. Typical
examples are high customer concentration, the
possibility of losing a key supplier or
employee, contingent liabilities, past claims,
leases due to expire, inaccurate inventory, poor
monitoring systems, etc.
While trying to build your business, even if
you have no plans to sell it, look at it through
the eyes of a possible buyer. By simply
identifying possible issues, and fixing them,
your business will improve immediately.
Likewise, these matters will not come back to
haunt you. Don't think they'll disappear or that
a savvy buyer won't uncover them. They'll stick
around and hurt you today and down the road.
Keep Good Books and Records
Any business broker will tell you that a
business with super-clean books gets the most
action, and usually the purchase price is very
close to the asking price. When the time comes
to sell, a business with clean books and records
will generally sell in the shortest time frame
possible. In fact, this is usually the
number-one reason why deals fall apart (outside
of major, sudden surprises).
In operating your business today, keeping
great books will allow you to always have a true
grasp on your cash flow and the ability to
properly analyze expense and other activity.
Systems, Policies and Procedures
I once read that a company's manuals,
policies and procedures should be explained in
such a way that the lowest-level employee can
understand them. If you incorporate a
methodology to deal with every possible scenario
that comes up, and modify it continuously, think
about the positive impact that can have when the
time comes to train a new employee, expand the
office, or open a new location. Instead of
wasting endless hours getting people up to
speed, all you need to do is “throw the book at
them.”
Similarly, every buyer is concerned that too
much of the business may be new to them or that
they won't ever be able to grasp the guts of the
business. With top-notch manuals, systems and
procedures, this concern will be completely
eliminated so they can focus on replacing you
effectively.
What happens if you get hit by a
cement truck tomorrow?
Can anyone step in and run the business? If
they can't, and something happens to you, the
business will go down the tubes quickly. Not
only will they forfeit your income, they
certainly won't be able to sell it. So, if you
are you “the business,” better start working on
your systems, or be certain that you always look
both ways before your cross the street!
Unless an individual comes from a like
industry, or is one of your current employees or
partners, they will be worried about the
transfer of your knowledge. Regardless of how
simple your business model may be, training a
new owner to do what you do every day is
crucial. The majority of people buy businesses
that are in new industries (I don't necessarily
agree, but that's the fact). As they go deeper
into evaluating your business, they usually get
nervous by thinking about all of the things they
don't know. If you don't have a simple mechanism
to show the new owner how to get up to speed
quickly, or if they fail because your job role
was too overwhelming for them, you too can
suffer if you've participated in the financing.
Unreported Income – You Can't Suck
and Blow!
If you're in a business where you remove
“cash” and don't report it to the IRS, well of
course, that's your business, and your risk. The
problem if you intend on selling the business,
is that you're only cheating yourself. Some
people claim that as long as you can “prove” the
figures you'll be fine, but it's not that
simple. You may not want to prove the figures.
If you've hidden it from the IRS, do you really
want a complete stranger knowing about your
“dirty little secrets”?
Furthermore, for every dollar you steal,
you're probably saving thirty cents or so on
taxes. On $30,000 a year, over five years,
you've saved yourself a grand total of $45,000
plus payroll taxes. Now, if you take the same
$30,000 per year, and record it properly on your
books, the total amount will be added back to
the total figure that a buyer will use to value
the business, including the payroll taxes.
Here's the kicker: businesses sell at a
multiple. That same $30,000 will have a two - to
- three times multiplier attached to it. On the
high side that $30,000 will increase the value
by $90,000. That's double what you saved by not
reporting it.
From an operational standpoint, that same
money kept in the business can be used for all
kinds of marketing or business-building. Use it
right; the money can have a significant impact
on the business, which again will result in more
money while you own it, and two to three times
more when you sell it. Sure, “cash” is sexy, but
in reality it's nothing more than a temporary
high, just like a “one-night stand.”
Well, all is said and done. If you approach
the daily running of your business like you have
to sell it tomorrow, you'll find yourself
implementing strategies that will immediately
improve your business, and will pay you multiple
dividends down the road when the day arrives to
sell it.
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