I’m working with a few clients at the moment who are actively working towards a sale of their business in the next 12-18 months.
And I’m also developing the financial strategy of many of my other clients, part of which includes building their business as IF they are going to sell within 5 years, even though at this moment they have no idea if they want to sell or not.
And there’s a really good reason why.
If you build your business as if you’re going to sell, you’ll build something far stronger and more valuable than if you trundle along, hoping that “one day your business will be your pension”
Most businesses, despite their owner’s years of hard work, are often worth very little when they want to move on. Because they didn’t focus on what would make their business valuable – to someone else.
But by building to sell, you’re purposefully creating something that someone else could run, that has strong processes and controls, and that becomes a lean machine that consistently generates profitable sales. And you’ll find that you’ll have far more choices available to you when you’re sitting on a well-run, profitable, cash rich business – sell or keep, either way you created a better long term future for yourself.
And that all comes from choosing to make very intentional choices from right now.
How to build to sell
Firstly, if you’re actively looking to sell in the foreseeable future, start getting relevant advice from your accountant, as there are specific things you need to be getting in order very quickly.
But assuming we’re talking about a longer-term timescale then these are the things you need to think about.
• The profitability of your business – not only in value, but as a percentage – I work with my clients to reach a net profit after tax and dividends of at least 10%, meaning you’re building retained profits and cash flow, and have the financial strength to invest in future opportunities and withstand future possible problems.
Having a profitable business means you need to know the profitability of your customers, products, services, jobs or contracts (you’d be astonished at the number of businesses who have no idea!) Apart from anything else, any potential buyer will expect you to know this basic information.
- The strength of your balance sheet – this is subjective, but something you need to keep an eye on each month and year. There are some simple balance sheet ratios you could include in your management accounts to keep you in the black and on track.
- Your cash position – you know how I like to bang on about buffer cash, well building up strong cash flow (that comes from having a profitable, well run business) is critical if you want to create choices for your future, not to mention banish the stress of cash flow from your life – and yes it IS possible!
- A marketing strategy that works – one that consistently brings in the sales you want, at the right profit margins. You need to know what levers you pull to increase sales, and that you can demonstrate to a potential buyer that your marketing strategy works. So if marketing is a black art mystery to you, you need to get your act together. Random sales from random marketing won’t cut it!
- Make sure you know what percentage of your sales your biggest customer is and if your business is reliant on any one or few customers. What would happen to your business if you lost them? A strong business doesn’t rely on any one customer and could easily survive without them. Any buyer would be very interested in this and you could de-value your business significantly because of the risk this carries.
- Your management team – they need to be able to run the business without you, because guess what, if you sell, you’ll be leaving. And even if you don’t want to sell, wouldn’t it be great to have a team that didn’t need to bother you with every last decision? A good test of this is what happens when you go on holiday!
- Make sure you’re earning a decent income from the business; you want a business that can afford to pay you properly (otherwise what’s the point?) and any buyer will want to get paid too, or be able to employ an MD, so your business needs to be able to demonstrate it can pay it’s senior people properly.
- Proper documented processes and procedures are an absolute must for any successful business, and doubly so if you want to sell. Start getting these in place now and they‘ll make your business run so much better, and likely more profitably. Get over any thoughts that processes stifle creativity – no processes means chaos, and I’ve never seen chaotic business make money.
- Find out how a business like yours is valued, because then you can create financial targets around these measurements. For example a valuation in your industry might be based on 5 times EBITDA (earnings before interest, tax, depreciation and amortisation) and you might want to reach a selling price of say £3m. So you’d need to achieve an annual EBITDA of £600k. But just a note, small company management accounts don’t usually include EBITDA, so it’s a good idea to start including this on your monthly figures and annual budgets so you’ve always got the end game in sight.
- Accurate monthly management accounts that forecast your full year position (and ideally the 5 year plan) are critical to any successful business, and an absolute must if you want to sell. Firstly it’s the only way that you’ll know you’re on track, but also because a buyer will definitely want to see them. And honestly the odds of you getting where you want to be without decent accounts are slim to remote.
Once you know exactly what you’re aiming for you can create a road map of how you get from the profit you’ll make this year to your target profit. A word of caution here – don’t assume you can double sales every year to get there, because it’s very unlikely you can do that without breaking your business!
Building to sell means you’re always looking for a better result, more efficiency, better ways of doing things, opportunities to up-skill you and your team – leading to more profitability, better cash flow and a stronger business, all as a result of how well you run your business. And who wouldn’t want that?