Beauty is in the eye of the beholder—How saleable is your business?
By Cathy Durham
Today, 70 percent of all businesses in the U.S. are owned by baby boomers, who are turning 65 at a rate of 10,000 per day, and only 10-15 percent of these owners have a plan for ownership transition. When it is time to sell your business, you do not want to get stuck in a bad situation where your expectations do not align with reality. Not sure where to begin? It all starts with business valuation.
As the classic saying goes, "beauty is in the eye of the beholder." Although some businesses appear to be successful, they may not be saleable for more than liquidation-the value of the assets less the company's liabilities.
You may have built what you consider to be a successful system integration business, but the real question is "would an educated buyer be willing to pay more than liquidation value for your business?" How do you know if your business would sell for a price that includes value above liquidation (i.e., goodwill)?
While there are many factors to consider, the questions below can help you uncover generally if a business would garner more than liquidation value, or if it would be more accurately classified as a successful career:
- Is your business too dependent on you? If you become seriously sick, injured, or die, would the business's operations survive long term? A test: Could you leave the office for a month without interacting with others at the business?
- Do the business's profits provide you, the owner, with a return on investment? Is your business profitable? Is it profitable even after adjusting the financial statement for market levels of compensation for you and other owners? Market compensation means your salary if you went to work for a competitor.
If the business can continue if you are not able to work and is profitable after adjusting for market compensation, the business is most likely saleable, or would garner a value greater than liquidation value. This is good news! Now you can focus on increasing the value of your business.
If you answered yes to the first question, or no to the second question, unfortunately your business will not likely be considered as saleable or transferable. It is possible to become a transferable business, though, and here are some ways to get started.
Let's use a fictitious system integrator, A+ SI, as an example. A+ SI is owned by Mike, and Mike is the sole customer contact for the business, because he wants to control the customer experience and likes working with customers. Mike also oversees the accounting and payroll for the business, because he does not want to share financial results or salaries with anyone else in the business. When Mike goes on vacation for a week he does not really "unplug." He is the only one who understands how the company's processes and techniques work together to deliver customer solutions.
Unfortunately, Mike is setting himself up for trouble, because the business cannot survive long term without his personal day-to-day involvement. So, when it comes time for Mike to exit the business, his only option is to liquidate the business's assets.
If Mike's goal is to eventually sell A+ SI for more than just the value of the tangible assets, here are a few ideas he could work on to create a transferable business:
- Document processes and systems in a central place that others can access.
- Build an experienced employee workforce. Train, cross train, educate, and motivate key people to stay in the business.
- Regularly include one or more team members in client meetings and communications.
- Delegate, delegate, delegate.
Other dependency issues include customer concentration or employee dependency. One customer should not represent more than 10 percent of your total revenue. Similarly, no segment of the business should be too dependent on one employee.
If the issue is that your business is not profitable and not generating sufficient cash flows for you to earn a return on your investment, reach out to your accountant or business advisor to identify ways to increase business profitability. Questions to consider:
- Is a customer, or group of customers, high need with low profitability?
- Are you pricing your services or products too low?
- Benchmarking: How do your margins compare with others in your industry?
- Do you need to structure your employees' compensation differently?
These are just a few examples of how to make your business more transferable, but there are numerous ways based on your specific business situation. With time and investment, you can increase the value of your business beyond what you see on your financial statement.