Less than 20% of businesses that go to market will sell. The majority of those that do, sell well below the owner's desired value. Why is this? Listen in as I discuss the top four most common business readiness issues and how to fix them. Addressing these four issues alone will set you apart from the remaining 80% of businesses that have no chance of selling.
So, in this episode, I will be sharing what the top mistakes owners make when trying to sell their business are, how are buyers looking at businesses to determine if it is valuable or not, and what are the value factors owners should be aware of to position their company for maximum attractiveness.
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"We are continuing our discussion on the three readiness factors and issues that come up when owners want to sell and transition out of the business. Welcome back to Business Exit Success everybody, Now quick recap if you are starting with this episode, the three readiness factors are personal readiness, financial readiness, and what we are talking about today is business readiness. The personal and financial issues I discussed on the prior two episodes. I strongly suggest if this is your first time listening to consider listening to those as well because all three need to be addressed well in advance if you are looking to sell your business sometime down the road, or even if you have no intention of selling,
addressing all three of these issues (personal, financial, and business) will set you on a trajectory to building an asset that if done correctly, you’ll have other businesses, you’ll have private equity firms reaching out to you because they want to buy your business."
"Can you imagine the feeling you’d have? You’re at the office, you’re on the road doing your thing and you receive a phone call with someone interested in buying your business. It’s gotta feel amazing. This is drastically different from what unfortunately I see happening much more often. An owner gets a health issue and physically or mentally cannot continue operating the business. Without a successor, without a team member that is willing and able to take over the reins of the business, they are forced to try and sell it. Sometimes they can get something for it, and sometimes the business is not marketable and instead, it has to be liquidated. Assets are sold off and you try to get whatever you can from it. This happens all the time. And it’s not just because of health issues, it can be from death, divorce, a disagreement between co-owners, or disaster. Like when COVID hit, many businesses went under."
"Another common scenario I see, and I shared this in the other two episodes on Personal and Financial readiness issues, is that you spend your entire life building your business, and finally when you are ready to sell, you can’t take it to market. I speak with M&A advisors all the time because they have their fingers on the pulse of the selling business market, because that’s all they do, and I’ve heard this multiple times from them that they are turning away hundreds of businesses that want to go to market because they are not ready."
"In this episode, we will discuss the reasons why they are being turned away and what you can start doing about it so that when you are ready to explore stepping away, you’ll be prepared."
How to look at your business from a buyer’s perspective
"How do we determine if a business is ready? First, we have to take a look at your company from a buyer’s perspective."
"Buyers of businesses are assessing risk. And they will evaluate the company on a number of value factors. I won’t go over every single one on this episode because there are a lot but I will hit the most common that if you just work on these alone, you’re putting yourself ahead of the majority of others out there."
The most common issue is owner dependency
"So first is owner dependency and this is the most common issue I see all the time. Everything runs through you. You do all the selling, you are the only one capable of delivering your services, and you are the face when it comes to working with your customers. When you are away, business tends to slow down, Customers come to you when they need something, your employees come to you when something goes wrong or they constantly are coming to you when they have questions. You are the main point person when it comes to working with your suppliers. All of these reasons cause you to become a worthless business, or I heard this from an M&A advisor and he said you don’t want to become a toe-tag business, which if you didn’t get that is a dead business. Why is this? Because if you are the main point person and you want to leave, all of those relationships, all of the sales that you are responsible for will essentially go away."
How to create a business not dependent on you.
"How do you fix this? Well, it’s a combination of things but it all comes down to having the right people, the right team members working with you in your business. Is there a strong and experienced management team in place that has demonstrated a track record of success with making business decisions, training your team members, handling internal conflict, etc. Or is the business largely dependent on you for its success?"
"Is there a strong sales team in place with a record of new account growth, without you having to get involved in the sales process? So you see where I’m going with owner dependency. Very simply, the less dependent the business is on the owner, you are adding value. As a consequence, you as the owner will get a lot of time back to work on the business further rather than having to work in the business. So you allow yourself to focus more on the strategic planning side, driving the mission and the vision for the company."
Do you have customer concentration issues?
"Another value factor is your customer base and if there are concentration issues. Do any of the company’s customers account for more than 10% of revenues? Do you have a long history with your major customers? Are they being added on a continuous basis? Is there quick turnover? Are the relationships dependent upon the owner remaining with the company? These are really important questions because again think about it from a buyer's perspective, as a buyer you pay for a business, and you want to make sure there is a high probability that there is plenty of growth left in the engine right? Buyers want to see a track record of customers coming on board with projections showing that positive growth will continue and they will want to see data backing that up. Naturally, all of us as human beings want to promote our past successes but investors aren’t as interested in where you’ve been as much as where you’re going. That’s why projections of future performance are so critical."
Have accurate and realistic financial projections
"This is a nice segway into one more that I will mention which are the company’s financials and financial projections. Your projections need to be both realistic and optimistic and will contribute heavily to your company’s price tag when it comes to a sale. So this is having a built-out Pro-Forma, which is a financial statement that typically includes projections for the future, including net revenue, cash flow, expenses, and anticipated profits. Base your projections on a customer-by-customer basis. So rather than just picking a random percentage number for growth, do a customer-by-customer audit of all your customers. Project what their individual sales will be for the future and then total up that number. You’ll be far more accurate than doing a straight percentage prediction."
"Ok so in review for Business Readiness, some of the big ones are building a business that doesn’t depend on you as the owner. The less reliant it is on you, the more valuable it will be. Try to not have any one customer make up more than 10% of your revenue and have your sales team be the face of those relationships. Lastly, make sure you have accurate and up-to-date financials with realistic Pro Forma projections.
Now, folks, there are many more value factors that play into this, I’m going to include a resource within the show notes that is of a sample business with descriptions on 54 Value Factors. It includes a description and questions for each value factor. It is a long document, but if you want to see what a buyer is looking for when they pop the hood of your business and take a look around, you will want to review this document in depth. And it’s free. The link to have access is within the show notes at beyondyourexitwm.com/podcast and this is episode 25. I hope you share and enjoy.