Carl Gerhardt
Editor’s note: This is the first in a series of four articles about exit strategies for small business owners.
An old Chinese proverb says, “He who rides tiger must find way to dismount.” When most of us got into what we could call a tiger of an industry, we never gave much thought to how we would dismount. “Someday, when I am ready and have ridden my tiger until he is ready to drop, someone will ride up on a white horse, pull me from my tiger, and hand me a bucket of cash big enough to buy my house at the beach.” All too often, this seems to be the attitude of small business owners. Ten or 15 years ago, this type of outlook may have been at least partially true. However, today this vision does not apply.
This article explores the first step in how to dismount safely and profitably from your business — preparing it for sale while building retirement assets outside the business.
When preparing for this transition, one must recognize a common mistake made by many owners. Erroneously, entrepreneurs in the industry will ride their tiger until it drops. This blunder is a sure way to decrease the business’ value to the point where it cannot be revived and has essentially no worth other than what can be sold at auction. Certainly, no one in their right mind would take this approach purposely. However, when owners have run out of steam or do not show the desire to keep up with the fast pace of change that has come to the industry in the digital age, sharp declines in a business’ value are inevitable.
As succession preparations begin, there are several elements of the business that must be in place before finalizing the sale of a business.
One important aspect is sales and marketing. Too often, this pair of critical cogs in the wheel of a company’s operations is ignored to the point that revenues either flatten out or actually begin to decline.
Flat sales are palatable to some, but when looked at more closely, flat sales indicate that inflation is outpacing volume and profits are falling. For example, three years of three percent inflation equates to a 10 percent decline if sales are flat. Hence, cutting investments made in sales and marketing is not a wise decision or an effective way to make the profits look more inviting.
Failure to invest in quality people is also a critical mistake owners are making. Industry requires that businesses are well staffed in all key disciplines of sales, customer service and production. When achieved, a business will begin to operate efficiently, to the point where the business can go forward without constant owner oversight. This does not indicate the need to overstaff, but rather to hire and hold onto good, experienced people in key positions who will continue with a new owner.
In addition, I challenge the idea of waiting until the last day to tell the staff that he or she is dismounting. I firmly believe that they should know the day you decide to begin a dismount plan.
Anything else would be unfair to them and to a new buyer. If key people bail out, the new owner has a huge problem and so do the original owners if they carry back any financing.
As a buyer, my purchase price goes up when I can meet and interview the staff and ensure that they will move forward with me. If not, the original owner is forced to discount their offering price for the unexpected.
The bottom line: Don’t you owe it to your employees to be up front and honest with them? They have helped you ride this tiger, so don’t you owe it to them to either help them dismount or continue riding with the new owner?
This can and should be a win-win situation for everyone.
In the 1990s and early 2000s, before the digital age took over, reinvestment in technology was not as much of a major factor in valuing a business as it is today. Today it is critical.
The life cycle of most digital technology is about three years. If one does not continue to reinvest in key technology it will be all but impossible to remain competitive.
Additionally, in many industries if firms do not keep updated and/or diversify into new products or services, there go sales and profits suffer.
Finally, many tigers have been ridden so hard that they have virtually no “curb appeal.” A big face lift and clean-up will do wonders to impress a potential buyer and to instill pride in staff members. Going to another city to tour several businesses like yours is one way to obtain ideas for your facility. Ask yourself, “Which ones feature an impressive look and feel?” Which impress you? Which would impress a potential buyer?
Put yourself in the shoes of your customers and employees and decide where would be the best place to do business or to work. Then, put yourself in the shoes of a potential buyer and ask, “Is this a place I would like to come to work every day?”
Equally as important as employees, business processes, and appearance is a business’ presentation of financial results. This is where the rubber meets the road for sellers when placing a value on their business.
Find resources in your industry that have examples of valuing a business. Many trade associations and/or consultants offer excellent resources for doing this. Many CPA firms do as well. Understand how fair valuations are made. Try and find firms that resemble yours in size and profitability and determine a range of values based on proven valuation methods.
Overall, the most important factor buyers and sellers should be focused on is how well the business is positioned to sustain and grow sales and profits.
Businesses are only as good as their last few month’s financial results. If they are producing strong sales and profitability, they are prepared for a safe dismount.
One important item to note for sellers is that they should be prepared to finance a portion of the sale. The majority of small businesses in the U.S. require owner financing when being sold.
While this may be hard for owners to swallow, if a business is appropriately positioned to be sold, it will command a fair market price or potentially an even better return with interest at a rate that should yield as much or more than mutual funds or fixed income securities.
Owners should seriously consider owner financing of a substantial portion of the sale price as a way to maximize a good financial return. Moreover, you can often command a higher sales price when owner financing is offered.
The bottom line is that owners interested in selling their business should want a fair deal with whoever purchases the business.
In the end, a seller wants the business to survive and thrive going forward for the benefit of employees and customers.
Carl Gerhardt is retired chairman of Alliance Franchise Brands, with 600 franchised print and sign locations worldwide. He currently volunteers as a SCORE mentor/consultant to small business, where his services are free of charge to his clients. He can be reached at cgerhardt@frannet.com.
