Can a potential buyer see himself in your business or are you blocking the way?
When preparing to sell or build value in your business, you need to step back. Strive to become dispensable, says Grant Mellow, ActionCoach.
Grant was one of several professionals who sat down with me last fall to discuss ways owners could add value to their business. He told us that ActionCoach’s definition of a business is a commercial, profitable, enterprise that works without you!
Grant was one of several professionals who sat down with me last fall to discuss ways owners could add value to their business. He told us that ActionCoach’s definition of a business is a commercial, profitable, enterprise that works without you!
“Many businesses are dependent on the contribution of the owner for success,” Grant adds. “If you want to add value, then make sure systems run the business and have a great team running those systems. If your business lacks systems and relies on you then it has less value.”
Working ON the business, not IN the business can be hard, especially for those whose business has been their means of self-employment such as a mechanic who started a garage or a baker who opened a bakery.
The greater value comes when the business is making money without its owner’s involvement in the day-to-day activities. This gives the owner the option of “retiring on the job” with income and flexibility in their life.
Making yourself dispensable
An owner’s role is to focus on the future – expanding operations, improving revenues and profits, planning-while bringing in the money for today. If you’re still working IN the business, make yourself unnecessary. Pay for the help you need. Hire someone else to take care of administrative duties so you can take care of more important matters. Learn to delegate and empower your employees. Give them challenges to improve their skills. Set goals and expectations and give them the chance to follow through. Hold them accountable for their actions and their specific jobs. Ensure you have:
- an organizational chart with defined positions, reporting lines and duties;
- the right people for the right positions (financial, management, sales);
Groom a competent management team. If people are in the wrong jobs, move them now; a buyer won’t know your people like you do. Get them settled in their new jobs before the buyer takes over. Good employees are your greatest asset and the landscape is changing. Most businesses have an increasingly diverse workforce; it’s not just Generation Y with their non-traditional work expectations, but a multicultural workforce made up of people from many cultures working effectively together. Documenting duties, responsibilities and expectations is more important than ever.
Also ensure you have:
- a current business plan with reasonable future projections;
- an honest analysis of your business’s strengths, weaknesses, opportunities and threats (SWOT).
Show prospective buyers the earning capacity of your business. Keep up your business plan as a living guide. Base it on your existing records, market and technology; document the steps that will take you there. Invite staff to contribute and keep it current.
Lack of full disclosure destroys trust. People have to trust you to do business with you. Never try to hide deficiencies. Buyers need to understand what they can do with the business. Profits are being generated with those weaknesses present; fixing them will increase profits.
Retaining key employees
Buyers count on taking over a business with experienced and knowledgeable staff, so losing key employees could affect the sale and value of your business. Find ways of retaining your key personnel:
- An incentive program with bonuses paid after the seller leaves;
- A special payment giving “consideration” for signing a non-compete agreement that extends two or three years after you plan to sell.
Some businesses are more prone to staff turnover than others. There is always a concern that key employees will leave to set up their own business in direct competition.
Jay Humphrey of Humphrey Law was also part of the discussion I mentioned earlier. He recommends that sellers secure non-compete agreements well in advance and structure them so that if there is a change in control, the agreement stays in place.
How long a term is reasonable? An agreement that specifies five years is unlikely to be supported by the court. The scope of expertise and defined geographic area in question are factors. What it comes down to is you can’t prevent someone from earning a living.
Even with an agreement that’s “enforceable”, you’ll want to weigh the cost and impact of litigation to preserve your position in the marketplace.
You may find it better to “give to get”. Negotiated solutions can work for all parties. Business brokers have experience here. We had a situation in one of our offices where a former employee opened a nearby business in direct competition just three months after we had sold a business. The breach was resolved without litigation by the seller paying the purchaser compensation for the breach.
It’s best though to avoid such situations and retain key personnel. How valuable is the individual to the business? We recently completed a purchase that saw a key employee receive 20% of the business to stay on. The terms and conditions can be anything that works and is agreeable to both parties.
What about you? Do you find it hard to “make yourself dispensable”. I know I do.
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The Process of Selling a Business