Less than 1% of all privately held businesses in the USA are successfully sold.
Less than ONE PERCENT!
Over 99% wind down, close up, go bankrupt. Or perhaps worse, they limp along and keep the owner in a state of business purgatory, unable to sell and too costly to stop, a virtual prison, a personal rockpile the owner must toil over with no end or exit in sight.
If you want to sell your business someday, you need to know what buyers and want and you need to start working on your business…now.
What do buyers really want?
Predictable recurring cash flows – It goes without saying, the business that can deliver a predictable future stream of revenue and cash flow is very valuable in the eyes of the buyer. These are businesses with a product the customer buys repeatedly. If you do this congratulations, because you are half way home.
Systems that work – A business is a system of delivering the desired results over and over. Think about the great franchises. They may not make the greatest product on earth, but they deliver it consistently and the customer can rely on the business to meet expectations over and over. Think McDonalds. The experience is consistent throughout their tens of thousands of locations. The system delivers.
Lower risk – See the first two items. They translate into lower risk for a buyer. Your business will be stacked up against every other acquisition opportunity and ranked based on risk. Lower risk means a higher valuation and a better chance of closing a deal.
Sustainable competitive advantage – Warren Buffet likes businesses “with a moat around them.” By this he means it is difficult for the competition to knock them down or take away business. The best companies have loyal customers because they deliver consistently, but they also make it really difficult for customers to switch, and never worth switching over a lower price.
Specialization, not generalization – My colleague and marketing expert Douglas Burdett likes to say there are “Riches in niches.” He is so right. If you are a generalist and do whatever the customer asks, your business is chaotic, and there is no hope that you can scale it up. Better to fire those customers and build upon the one or two things where you really excel. I recommend you follow Douglas – his weekly Marketing Book Podcast is nationally renowned.
Cash flow that favors your business – I learned this the hard way. Investment bankers get paid very well…when they get paid. A small retainer up front is nice, but the bulk (90% or more) of revenue comes in when a deal closes, after the work is done, and sometimes many many months into the project. Worse, up to two thirds don’t ever close – sunk cost and no way to monetize all that wasted effort. On the other hand, many product based businesses get paid immediately upon or in advance of the delivery of the goods and services. If you can productize your business, and get paid up front, the buyers will love you…LOVE you.
A diverse and healthy customer base – If you have a single customer that makes up twenty percent or more of your revenue, you are in trouble. A buyer worries about what will happen should that customer go away. Better to have a lot of customers because that reduces the risk – no matter how long or how loyal you claim that customer may be, prepare to discount the price of your business.
Well documented processes – A smart business has its procedures, its way of doing business, well documented. Its employees are trained and perform the tasks consistently. If an employee leaves, the spot can be filled, the new employee trained. The business doesn’t miss a beat. See reducing risk.
The business is not dependent on the owner – If you are the owner and you are working in the business, watch out. I tell all our clients that the owner has to work on the business and render himself redundant. It should not matter if you leave. It should have no impact whatsoever. If you are hands on, handle the big client, or carry a lot of the burden, don’t even try to sell until you fix this problem.
Peace of Mind – The buyer wants to sleep at night knowing the right decision has been made. No buyer ever has perfect information or complete due diligence. So they have to feel good about the acquisition. I have seen countless deals fail because of the gut feeling a buyer develops. I always coach all my clients to consider their gut feeling – it is often correct. If you cannot deliver peace of mind to the buyer, you’ll be part of the 99%.
So, unless you want to leave millions on the table, or never sell at all, start working on the business exit …today.
Bob Louthan is the Founder of VeteranCrowd, LLC. Follow Bob on LinkedIn.