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You start a business and most likely you are excited. You have a great idea and you can’t wait to get going. At this moment the last thing you are thinking about is selling your business.
However, as your business gets established, the idea of positioning it for sale (even if you have no intention of selling) is always a good idea.You may indeed run your business for the rest of your life, or life make take an unexpected turn and you will need or want to sell. Either way, creating a business that is always positioned to sell is just a smart way to run a business. Let me explain.
Is Your Business All About You?
When I decided to sell my first business I went to lunch with my broker and described my business. I was really into personal branding back then and so I had formed my business in my image, injecting myself everywhere in it. Now, when it came time to sell, this was a liability. A buyer wants a profitable system for making money and if that system relies too heavily on the owner then you will likely be penalized with a lower valuation. I spent the next 12 months extracting my image from the business and ended up selling for the price I wanted. I could have saved myself a lot of effort by thinking about this when I started the business.
It is somewhat of a balancing act. If you are starting a business from scratch then it is often all you. You do everything and the business is likely an extension of your personality. But as you grow and add employees you can build systems and the business can become less dependent on you. But if you are the one closing all the deals, your face is on the web site, you write the blog and newsletter then be careful. Your customers may be more attached to you than your product or service. Any savvy business buyer will be wary of that.
A Profit Making System
You want to create a profit making system that is at least somewhat independent of you. There are two great books that every small business owner should read on this subject. From the 1990’s the classic The E-Myth Revisited by Michael Gerber and the recent bestseller, The 4-Hour Workweek by Timothy Ferriss. These books emphasize the importance of creating systems and extracting the owner out of the day-to-day operations. Most importantly, if you are making decent money but are working 80 hours a week in order to create that income then your business is worth substantially less than someone who can create the same income in 20 hours a week. What is most valuable is a business that is highly profitable and is independent of the owner.
As entrepreneurs we can fall in love with our business. They are our baby and we want to leave our imprint everywhere. This is understandable and may even be the right strategy in the short term; but as you grow your business you should always be aware of the impact of these actions. Even if we decide not to sell it is healthy to create a business that doesn’t need the owner’s input on everything. By doing this not only will you create a more valuable business, but you will likely enjoy your work more.
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Joel Libava
Great job, Peter.
Those of us with one-person businesses are in a bit of a jam.
The only way to go for us is to bring someone on, and then sell it to them.
(But it still beats working for an idiot!)
The Franchise King
Great stuff, I really enjoyed this one because I inject my personal brand into my businesses a lot so it is a good ‘warning’ for me if i want to sell down the line.
Great article Peter – I would also add another great [new] book to the list of E-Myth and Four Hour Work Week – Built to Sell by John Warrillow – http://www.amazon.com/Built-Sell-Turn-Your-Business/dp/0986480304
Peter Renton,
Interesting post. I have heard good things about The E-Myth Revisited by Michael Gerber, so I have to read it soon. I enjoyed the 4-hour Workweek very much and I have been thinking of creating additional revenue streams (e.g., “passive” / residual income) for a long time. The hard thing is to do many things at once when you are running your small business.
Dead on. Some people believe that thinking about selling from day 1 is counter productive. I’d say it’s counterproductive NOT to think this way. It frames each business decision and relationship in a longer term context for me. Thinking about selling forces better book keeping practices too. This mentality has pushed me to build relationships with potential buyers and successors too. Although I haven’t “found someone to buy my company” yet…I’m building the brand into something more than me. Nobody expects that being in business for themselves will be “their old job plus everyone else’s but sadly it turns out this way more often than not. Thinking about selling has absolutely driven me to avoid that trap and build something bigger than me.
Julia Aquino
Don’t forget the Operations Manual. When well-written it gives the buyer (or an employee) the tools to operate the business seamlessly in your absence. Then it is not all about you…
I read of a book several months ago that covered the same idea — it was about creating a business you could sell (not a how-to, in terms of how to sell a business). It made some very interesting points — I only wish I could remember the title. Maybe it will come to me later. I do want to recommend another resource for those who want to start a business, “Ultimate Boomer Business Launch Workbook,” by Jeff Williams. Obviously it’s geared at the Baby Boomer crowd — it’s a great start-up guide for starting your own business (and there are a lot of us out there, both willingly and not). The author himself launched two businesses after age 50, so he knows what’s involved and knows, first-hand, that you can take a dream or passion and turn that into a successful business.
I agree with creating systems that allow the owner to remove himself/herself from the day-to-day operations, but you don’t have to totally remove yourself from the branding either. Ford still leverages Henry Ford’s influence on the company and Bruce Clay Inc. is a very successful internet marketing company where every “client” knows that Bruce isn’t working on their account.
John Reddish
Peter,
Nice overview piece. Should make most entrepreneurs think. You are quite right about the business having an identity beyond that of the founder, and that exit strategies are important from day 1! Too few do this and when life intervenes, it can become messy.
In my many years working with entrepreneurs on developing and implementing their succession plans, exit strategies have been a focal point. The founder is usually concerned with his/her Legacy (being remembered, or leaving something viable behind), with his/her Liquidity (maintaining lifestyle from business sale proceeds) and Letting Go (which is often the hardest aspect). While I get little resistance from the founder in crafting hypothetical “exit strategies,” getting them past “go” without a life changing event or a planned exit are tough.
You also mentioned growth. Growth (and building value) can be by head count (both employees and Independent Contractors), by managing a body of IP (licensing, product sales, etc) and by a planned harvesting of profits over a period of time. Each of these approaches leads to different exit strategies.
Thanks for raising the visibility of exit strategies. John
It’s always a great idea to have along term strategy in place for your business. If thinking about selling it from day one helps people do this then it has already served its purpose.
So true, Peter. Every business should have an exit strategy before they open their doors, which I learned from a smart business coach.
Peter Renton
Great comments everyone, thank you.
@Joel – a one man business is more challenging but it doesn’t mean you can’t create a salable business. The trick will be in systems and documentation. As @Julia said, a well-written operations manual can give a buyer the tools and the confidence to operate your business.
@Doug – I didn’t specifically mention bookkeeping practices but that is also critically important. A buyer needs to be easily able to see and understand your historical financials. It sounds like you will avoid the “owner’s trap” when it comes time to sell.
@Robert – you bring up a valid point. It is somewhat of a balancing act. A personal approach to business is something I always advocate, many customers like to find out more about the person behind the brand. I would say Ford and Bruce Clay Inc. have done a good job maintaining that balance, while at the same time obviously introducing systems that are independent of themselves.
@John – most entrepreneurs only ever start one business, so that business is not just a big part of their lives, it is their identity. I imagine these are the people you are talking about – many probably think they will exit the business when they die. Tough to get these people to take action on their exit strategy.
It seems like most new businesses are a bit too obsessed with this idea, in my opinion. Create a business with the idea to sell it? How self absorbed and uninspired. What is wrong with providing a good service to your community and being content with that? Like a window cleaning business for example. Maybe you sell it one day, maybe you do not. start a business that will make the years doing it worthwhile.
dean graziosi
Its interesting for me to read about your experience for selling a business.Its good that you have recommended two books to us.I think highly profitable business is very much important as you have written in the post.Your last paragraph of this post is really a good read.
In my experience about half of the total wealth that is created by the formation of a new business occurs at the moment of sale, so that unless you are just looking to own your job, this article contains excellent advice. If selling your business is part of your plan from the get-go, many decisions you make will differ substantially from what might otherwise be the case. Three quick examples: (1)You will manage the business to proven profitability instead of focusing on tax avoidance strategies that make the business look profitless. (2) You will hire people early on who have an interest in entrepreneurship and who are potential buyers (selling to an “insider” is much easier and safer than selling to an outsider if you plan to offer seller financing), which brings me to (3) You will plan your personal finances so that you can provide seller financing. Based on my experience, the extra earnings (interest) from seller financing can easily add 25% to your total income from the sale. I have a whole section on the strategy of starting a business for the purposes of selling it in my book “Creating Wealth With a Small Business: Strategies, Tactics and Models for Entrepreneurs” See http://www.amazon.com/Creating-Wealth-Small-Business-Entrepreneurs/dp/1439214581/ref=sr_1_1?ie=UTF8&s=books&qid=1237075955&sr=1-1
Aaron Thomas
Great article Peter, thanks for sharing!
Exit strategies are a complete topic apart to discuss. This almost always overlooked factor should be always part of a business plan.
Believe me, you will need it!
There is an interesting conversation I
Barney Austen
Hi Peter. A worthy reminder – thanks. When we established our business, the intention was to grow and enjoy both the process and what we were bringing to the market place. However, shaping many of our decisions was the decision that we made at the offset that we want to create an entity that someone would like to write a cheque for some day. We wrote this up on the board and it is helping decisions daily as this would be our end game. If we are doing things that do not contribute to this end result, then we stop doing it and focus on things that do!
Best
Barney
Peter Renton
More great discourse everyone, thanks again.
@Ev – while I agree one should not obsess on the idea of selling your business, I disagree that thinking about selling is self-absorbed and uninspired. People start businesses for many reasons, and for many people it is their best shot at financial independence. I don’t see anything wrong with that at all. But my point is that even if you have no intention of selling, running your business in such a way that it is ready to sell at any time is the smart way to run a business.
@Ralph – regarding your point one, I think it is fine to focus on tax minimization strategies. Any potential buyer will want to see your “normalized” earnings, earnings that take out such tax minimization strategies. Buyers realize that business owners want to reduce their tax bill where they can. You bring up some good points about seller financing. Seller financing is a great way to add to your total income. Organizing your finances so you can do this will add to your options.
@Barney – good point. Keeping the end goal in mind will help you make many difficult business decisions.
Peter…you are right of course that paying a lot of extra taxes just to make seller financials look good is silly. Buyers should know that certain adjustments will be necessary to get the profit picture into clear focus. But in my experience buying a small business (or for that matter selling one) is a highly emotional event. Everybody is scared, nobody is 100% sure of what they are doing. If the adjustments are too complex or depend too much on unverifiable or squishy assumptions, the buyer can easily lose confidence and walk away. From the seller’s perspective this is as much about completing the deal as it is about maximizing the selling price. To help assure completion I emphasize confidence building by the seller which includes financials that require minimum “adjustment” combined with the willingness of the seller to take on all or most of the financing. Seller financing shows that the seller has confidence in the future of the business and this makes the buyer feel a lot better about signing the deal. (It also puts more money in the pocket of the seller at the expense not of the buyer but of outside lenders.) If the seller thinks the business is a dog or is overpriced, he/she will not want to participate in financing and the buyer, sensing that, can make his/her final buying decision accordingly. I talk about all of this in great detail in chapter seven of my latest book. Thanks for your insightful feedback.
Nice post. I’d like to add a few things. It’s quite common for small business owners to name their businesses after their own small and/or last name. While that gives a personal tone (good thing for small businesses), it certainly makes it harder to sell the business down the road. That’s obviously due to the fact each business comes with a name and a name comes with reputation.
In my opinion, it’s generally not a good idea to build reputation around your own first and/or last name if you’re thinking of selling the business… some day.
Which, I agree with Peter, is something every small business owner should keep in mind from the moment he or she opens the doors…
Great article, Peter. I sold my software business using a similar approach, I had my exit strategy sketched even at the business planning stage. I was recently interviewed about this, here is the interview:
https://webetripping.wordpress.com/2015/08/04/podcast-how-an-entrepreneur-achieved-lifestyle-freedom/
All the best.
It’s interesting to know that as a business owner you need to create a business that is independent of you. My father is thinking about selling his business, and we are looking for advice. I will let him know about your article to help with his decision.