Prepare if Selling Business
October 30, 2011
Rural Business Manager & Business Advisor
SAN ANGELO, Texas — Can your business run without you?
That is the No. 1 question you must ask yourself as you begin to prepare to sell your business. If the answer is “no,” then it is time to start making changes to your business well in advance of placing it for sale.
As the business owner, you have all your company information stored in your head. If you are to create a business that can run without you, you must prepare an instruction manual with that knowledge. If the information stays in your head, you will be required by the purchaser to stay “on board” while the new owner learns the ropes. This is referred to as an earn out. The eventual sale of the business can also hinge on whether or not the business performs at the projected levels and at projected milestones. If the business does not perform, then the sale could fail. All the while, you are still working there.
Knowing this in advance will help motivate you through the process of preparing your business to be sold. John Warrillow, author of “Build to Sell,” challenges business owners to create a Standard Service Offering.
“This is a consistent process for delivering a service (at a level where the focus is) at the exclusion of other services,” Warrillow states.
Analyze your services as to the client value and the teach ability. Warrillow adds, “Once you’ve isolated the service that clients value, need often and is teachable, document your process for executing this type of project.” Simply focus on what it is that you do well. Customers will pay for a job well done.
Narrowing the focus of your business can be a painful exercise. Think of your business as a target. The center of the target represents two things: doing what you are good at and getting financially rewarded for it. The outer circles of the target represent the business that strays from the center.
You are going to have to turn down business that sits on the fringes of the abilities of your company. You are going to have to turn down business that doesn’t make a profit. The first time you turn down business, you will feel sickly empowered! You’ve made that statement that you are a specialist in your field.
As you make these changes, you will also find there are employees who do not fit the company’s new direction. You’ll need to let them go. The people you hire now for your redesigned business might very well be the people that transfer to the new ownership. Be sure to plan job descriptions, pay structures and incentives so current employees will choose to stay with the company at the time of the sale, serving to create a package deal for the business purchaser.
Your goal should be to hire a staff that is perfectly capable of running the company. This will “extract you from the epicenter of your operations,” Warrillow mentions.
Your business needs to show a positive cash flow. Begin to assess how you charge for your services. Your clients probably will not pay for the entire service up front, but they would pay half the amount. This will help with cash flow. Also analyze your client base, and don’t put all your eggs in one basket. Warrillow recommends that your client base is diversified, and the revenue from your largest client makes up only 15 percent of your total revenue.
Before you can sell your redesigned company, you must have a financial track record. It is best if you can provide three-year financial records for your redesigned business. The purchaser of your business will need these financials to provide to investors or lenders. This means you need to begin planning immediately to sell your business in four years. And yes, a business plan is imperative.
The advisers at ASU’s Small Business Development Center can assist you on this journey; just give us a call.
“Business Tips” was written by Peggy Hodges Rosser, Rural Business Development Specialist and Certified Business Adviser IV of Angelo State University’s Small Business Development Center. Contact her at Peggy.Hodges@angelo.edu.