Selling your business always starts with planning and takes a lot longer than you expect. If you haven’t already read / listened to part 1 of this series, then go back and start there as I share a framework of probing questions to get even the roughest plan in place and hopefully get a few cogs ticking in how you’d like your business exit or succession to play out.
Many businesses need to be cleaned up or re-vitalised to maximise the ease and ROI on their exit. And this takes time. Each business owner is unique, business models vary, as do planned exits. Even if the thought of a business exit is way off in the future, the process of de-risking and re-vitalising a business for sale will result in a much more valuable, profitable and smoother running ship. Most people know from selling a car, in many cases the best it ever looked and performed was when someone handed over the cash and drove it out of your driveway.
Ask yourself, what if you were approached tomorrow to sell your business. Would you get the maximum dollar and terms based on how it is running now? Most business owners cannot confidently answer yes. So let’s look at some of the most common areas a business needs a tidy up:
Dependent on Business Owner
This is one of the most common issues with not only growing and scaling a business but also when looking at an exit, is the business dependent on you being there?
A business that runs itself with marketing, sales and delivery systems and team members in place will be FAR more attractive to a buyer than a business that relies on one key person.
Think of it from the buyers perspective, they have 2 businesses to choose from, one runs itself and one revolves around a key person, which do you choose?
So the first step is to put a plan in place to start removing yourself from the business and that starts with identifying what exactly are you doing. What are all the tasks that you do personally and how can these be delegated to other team members or potentially you may need to hire. Call it the ‘Task Transfer’.
If you are, say, a world leading expert in back surgery on Dachshunds, then thinking more strategically, what exactly are you selling? Is it your business or your world leading intellectual capital that’s sitting in your head?
Standard Operating Procedures
Is your business documented on a task by task basis compiling what are known as Standard Operating Procedures or SOPs? This is a forced method of extracting your way of doing things onto paper (or Google Docs) so it isn’t lost through key people leaving and is a process to easily train new team members.
Imagine a role such as a receptionist. There would be an SOP on how to book appointment, how to answer the phone, how to do the mail, how to structure a letter, how to do a stocktake on office supplies.
So when someone needs to fill in or a new team member comes on board, they are given access to all the SOPs for the role to learn and refer to.
This becomes powerful when you have a proprietary way of doing things. You might be very efficient, or very fast, or you might never make a mistake. That is important not only for every other team member to learn and implement but a buyer of your business could reap massive rewards from implementing your procedures over their much larger and clunky workforce.
There are a few ways to create SOPs. Firstly, if a task is completed more than once, create a SOP. I like to use Google Docs and keep them brief, say 10 dot points. I like to go a step further and record my computer screen to give a live demo. Another example I use is recording client Discovery Sessions so future team members can learn how I take the written Discovery Session SOP and translate it into a meaningful session with a client.
I’m sure there are tasks you do really well in your business but it’s no use having them in your head so get them on paper.
Accounting & Legals
Most business owners cannot confidently say that they are on-top of all things compliance, accounting and legals in their business. If you are, kudos to you.
Proper legals include shareholder agreements, employment contracts, supplier contracts, client engagements, lease agreements, financing agreements. Ensure you have them in place and up to date. If unsure, get on the phone to your lawyer.
Now let’s talk the fun stuff, Accounting. Is all of your compliance up to date including all things ATO & ASIC? Do you have your most recent and last 3 years worth of financial statements prepared by an accountant (and possible audited)?
They are pretty run of the mill and should be a standard. What about these questions to see if your finance department is up to scratch:
- how does your revenue, gross profit and net profit margins look like over the last 3 years? Trending upwards?
- do your clients pay their invoices within your stated terms?
- are you holding too much or obsolete stock?
- do you have a budget and 3 way rolling forecast?
- do you understand what metrics drive growth in your business?
- do you prepare monthly management reports?
If your accountant is not providing these services or this level of advice, you need to speak to a Virtual CFO.
Reliance on Key Customers and Suppliers
When valuing a business, the framework commonly used is something called the Porters 5 Forces and two of the components revolve around your customers and your suppliers.
There is an inherent risk around whats the Porters framework calls ‘Bargaining Power of Customers’. This basically means if you have a handful of customers that make up a large chunk of your revenue, then there is a risk that if they leave or put the hard word on you, they have the power to really hurt your business or put a strangle hold on the way you work together.
The same goes for Suppliers, do they have any power over you and how your business operates?
If so, what strategically can be put in place now to de-risk key customer and key suppliers? Imagine your biggest client advised they are leaving in 6 months time, what you start doing today? Or what is your key supplier could no longer supply a product or service in 6 months time, what alternative could you action to hedge your bets?
So how does your business stack up? Need a bit of work to de-risk?