Work Out your Exit Strategy on the Way In.
From the day you first walk into your business, you should be planning for the day that you finally walk out. I know that sounds a bit pessimistic, but it isn’t. It’s actually a really clever way to make sure that you maximise every opportunity you have whilst you own your business as well as when you finally sell it, hand over to family or even close the door.
Why would you plan the exit strategy for your business when you’ve only just opened your doors? It’s because it sets a standard in your mind that your business must always be operating at peak performance, should have strong visibility in the community and look amazing every single day. If you achieve that consistently, you will not only make the most money possible while you own it, but also when you sell it.
“There are two ways that your business makes you money. The first is from the profits you make for all the years that you own it, and the second is when you sell it. ”
You must always think of your business as a sellable commodity. It’s a valuable asset that should get you nicely cashed up when you’re ready to move on to whatever your next chapter will be.
Let’s break it down as to why you must start your business with the end in mind:
If your business always ready to sell, it will always be performing at its best.
Think about it, a business that is on the market to sell should present well, have up-to-date financials, have a good online and marketing presence and be running efficiently with well trained staff. This is what makes it appealing to a buyer who wants to just walk in and hit the ground running. This is when it’s at it's best.
But, it should be at its best every single day, not just when it’s ready to sell. Don’t you want this for yourself too?
Why would you only get your business running like a well-oiled machine just before you’re ready to sell it? That doesn’t make sense – and doesn’t make cents.
Don’t wait until you decide to exit the business to finally get it ship shape. Why not have it at a sellable standard every day? That way it will always be at its most efficient and probably its most profitable – two things every business owner wants.
Having your business ready to sell is freedom should you ever need to sell in a hurry.
One of the differences between being a business owner and an employee is how quickly each can change direction in their life to suit their circumstances.
An employee simply puts their resignation in and off they go to their next adventure, whereas a business owner has to figure out their exit strategy. If they want (or need) to leave, they only have a few options - close their business and wear the costs, get a manager in and hope they stay, or sell the business.
All of these options take a lot of time and sometimes you need to act fast. What if you’ve met the love of your life and they’re about to jump on a plane on an overseas adventure without you? Or something happens to a family member and you need to free yourself up to care for them, or you’re just wanting to cash up, buy a caravan and head off around the country.
If your business is ready to sell on any given day, your exit strategy is that much easier and quicker. It gives you the freedom you need for whatever the future hands out.
Always planning to sell makes you actively focus on profits whilst you own the business.
High sales won’t get you a high price when you go to sell the business'; it’s high profits that do that. And high profits is the name of the game for all business owners throughout ALL the years they own the business, not just when they want to sell it.
You’ve heard the saying, “Sales are vanity, profit is sanity.” It’s easy to get caught up in watching the end of day/week/month sales figures and patting yourself on the back if they’re looking good, but they’re not much help to you if there’s no profit in there for you as the owner. What will you take home to pay your bills and the mortgage?
You have to aim for your business to be profitable every single day - that’s important when you own it and it’s important when you sell it.
From day one, you will understand the TRUE COST of taking stock from your business.
Selling a Business 101 – you won’t get the best price for your business if all the time you’ve been taking money out of it.
Every time you take stock off the shelves to feed the family, or wear out with friends, or for the kids or pets to play with, there’s a price to pay. You think you’re saving money because you’re only paying ‘cost price’ – the price you purchased that item at from the supplier. But, in the long run it’s cost you about four times more because you’ve not only lost the potential for that item to make you profits but you’ve just reduced the sale price of your business when you come to sell it.
This is called inventory shrinkage. No one likes shrinkage, especially when it’s owner-induced!
Let me prove it to you. Go to this blog page “Inventory Shrinkage - No one likes it, especially when it’s owner induced!” It will demonstrate the true cost of taking stock from your business.
Building a strong business reputation will always translate to a premium sale price.
The definition of the word ‘reputation’ is a wide-spread belief that someone or something has a particular characteristic. In business, that reputation is built by laying good foundations from day one on which layers of excellence are built over the next few years. Only then have you established your reputation that you can cash in on when you sell by asking a premium price.
A buyer can spot a business that’s reputation has slipped and which has been prettied up for a sale. They will look on its socials, read any online reviews, check out the Google Business page for customer photos and comments and ask others in the area. There’s no where to hide any more if you let your business run down and then try to sell it. A lick of paint, a few quick campaigns to boost sales and a rush of posts on your socials are just bandaids that are easy to see through.
Also, it’s fairly common for a buyer to come from your own customer-base. You won’t be able to pull the wool over their eyes - they’ve known your business for too long. They will hopefully be emotionally invested thinking that they what you have - a wonderful business that’s running like a well-oiled machine. Or alternatively, they will know that you’ve run out of steam, that the business reputation is on the slide and that they will have to spend money to get it back up to its glory days - and they will adjust their price accordingly.
You will only get a premium sale price if you have a premium business with a strong, long-term reputation.
You will get the best price possible when you eventually sell your business.
To understand this, you need to know how businesses are valued when it comes time to sell. I’ve seen so many small business owners almost pick an inflated number out of thin air to put their business on the market. It always reminds me of watching those business investor TV shows where entrepreneurs who think they have a business (although it’s often more of a thought bubble) value it at an exorbitant price hoping that the investors will give them a bucket-load of money. But all that happens is they get a quick lesson in how to correctly value their business, and we then get to watch them deflate like a balloon with a slow leak. The same thing happens to a small business owner that can’t back their valuation up with the cold-hard facts that are in their financials. See below for your quick lesson in valuing a business.
Business sellers often forget that, while they might get interest from an emotionally invested buyer who looks really keen, standing behind them is a dispassionate accountant scrutinising the profits shown in the P&L’s and balance sheets to make sure that, if their client pays the price that the seller is asking, there is still an opportunity for them to make a reasonable profit (ROI). After all, the best predictor of future performance is past performance.
Let’s do an action replay of what I said earlier: “High sales won’t get you a high price when you go to sell the business. It’s HIGH PROFITS that do that.”
A buyer and their accountant will be wanting three years of solid profits in the financials. If you don’t have three years worth of figures to show them, you’d better make sure that what you do have shows strong profits to back up your sell price and the best way to do that is to make sure that your business is profitable from day one. That is, plan to sell it from the first day you open the door.
BUSINESS VALUATION - The Earnings Multiple Method
A common way to value a business is the ‘earnings multiple’ method. Put simply, the value of your business is calculated by taking the average of earnings before interest and tax (EBIT) over three years (preferably) and then multiplying that by a ‘multiplier’.
Business Value = Average Earnings x Multiplier
The multiplier is usually industry specific, based on the business size and is a direct reflection of its perceived value or risk. A business broker who knows your industry would give you guidance on what this number would be. They would take into account the unique strengths and weaknesses of your business and compare it to other similar businesses on the market or that have sold.
Average earnings is the average of the profits (EBIT) over three years, preferably.
The aim of the game is to get those earnings (profits) as high as you can for as long as you can because that gives you the highest number possible to be multiplied. Note that, if you only have one or two years of financials, you may find the multiplier is adjusted down.
“High sales won’t get you a high price when you go to sell the business. It’s HIGH PROFITS that do that.”
This is why there’s almost no point trying to boost sales or profits just before you put your business on the market. You’ve missed the boat!
High earnings for use in a valuation don’t come in the last few months before you put your business on the market, they come from several year of having a well-run business that has consistently maintained strong profits. That brings your average earnings (EBIT) up and when that’s multiplied…. ka-ching!
