Why most business owners never sell their business (and what you can do about it)

Hamish Mexted Business Strategy & Planning, Increasing Profit, Time Saving & Processes, Xero & Addons

Day, after day, after day. Turning up at your business, doing your job, heading home. For many business owners, the dream of running their own business is no better than the 9 to 5 grind of having a job.

These business owners went into business to earn more, control their direction and have more time in their day. Often, they end up earning the same as what they would having a job, work weekends, and feel trapped or tied to their business – we often hear owners saying that “the wheels fall off without me”.

To cap it off, they probably won’t end up selling their business either. No sale, no gain, no reward for the slog.

Here’s the thing – it doesn’t need to be like this. We prefer to see people building businesses which are highly profitable (above just a wage for the owner), which let employees run the ship (not the owner), and which are saleable. Highly saleable.

Let’s break this down to see what you can do to make your business highly saleable.

The most saleable business

In our experience, the most saleable businesses are those which:

  • Are heavily reliant on their staff (all of their staff, not just a key one or two)
  • Have strong internal processes which are followed religiously
  • Have their staff managing key client relationships
  • Aren’t too reliant on particular clients or suppliers
  • Have a clear path to future growth and maintained profitability

Now at a level, these businesses are like flying unicorns – often sought but seldom found. Typically they’re businesses at the top of the Business Growth Curve:

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They’re the businesses which have worked out the secret sauce for their business, and (from the outside) seem to make everything they touch turn to gold. In our experience, it comes down to knowing what’s made a business successful to date, and knowing what they need to do to reach the next level of business. Knowing this drives them through the Stages of business – from being a Good Idea through to a business which achieves Leverage and can be sold.

In short though, the most saleable businesses are at the top of the Curve.

Four ways to build your business

Grow personally

This is first in the list for a reason – a business will never be bigger than the owner. I fought for the first three years of my business to grow, to take on staff and to get a proper office. I was pushing the proverbial up hill. I wasn’t moving because my personal development, emotions if you like (an icky work for an accountant who just wants to deal with numbers), wouldn’t let me. Once I got through that, our business reached another plateau (12 or so months ago) where it was capped at my personal peak. This isn’t hiring staff to do the things you’re not good at – this is self-awareness, personal understanding and being willing to change.

What was going on for me was that I felt like a fraud, like I didn’t deserve my seat at the table. As long as I held onto that feeling, I’d be unable to grow my business.

Understand what has made you successful so far

As a business owner, I’m exceptional at seeing what isn’t right at work. The 3% which doesn’t go as it should – mistakes, unhappy customers, staffing problems. This 3% is the minority though, and crowds out the brilliant work we’ve done and still do. In my experience, any business owner who’s able to focus on what’s made them successful, rather than focusing on the 3%, will keep moving ahead quicker.

It’s the client who decides to complain about the price on a job, even after we’ve given a fixed price quote prior to starting the work. It’s the staff member who pushes the limit with time out of the office. It’s the process which doesn’t get followed causing you to lose a customer. This is the 3% I focus on. If I can identify and hold onto why we’re successful (customer service, quick job turn around, and pushing uncomfortable conversations to help families build wealth), rather than the 3%, then we’ll be more successful. The alternative is to focus on fixing the 3%, and neglecting to keep doing the things we do well consistently.

Identify what you need to do next to reach the next stage of business.

It’s well and good to have the power of positive thought (essentially what I’ve told you to have in the last paragraph). I’ve got to know what’s next. In the same way that a staff member wants to know what’s next for them and their career, I’m more engaged with my business if I have a clear idea of what’s next for my business. Where we’re heading strategically, plus the tactical things I need to implement in the business to drive it there.

Work in your business, not on it (yes, you read that right).

Here’s the thing, people tell you to work on your business, not in it. This implies there’s a distinction between the types of work you do (I’m either working in it, or on it). This distinction holds businesses back. The business owner will try and carve out time to work on from their “busy” lives, yet it just doesn’t happen. It never happens. A fundamental shift in thinking needs to happen. Being a business owner means that your job is constantly building a business. At times that means constantly getting stuck in to fire fighting and doing work. At other times that means constantly improving systems, processes and people. You need to constantly be working in your business, just with a solid understanding of what the best use of your time is right now.

Everyone’s too busy, including me. Despite being “too busy”, I haven’t done any client facing work on a Tuesday for the last 18 months. Based on other people’s language, I’ve spent this time “working on my business, not in it”. To me, I’ve spent this time doing my job. I’ve developed manuals, built relationship with key partners, recorded training videos, written articles. I’ve done the things busy business owners wish they had the time to do – I’ve made the time, they haven’t.

For the first few months of not working on Tuesday, it felt awkward and pressured. I felt like I didn’t have time. Once I got use to the routine, and stopped pressuring myself to get as much client work done, then it felt normal instead of awkward. Now I’m toying with taking Thursdays off client facing work too. Right now, I think I’m too busy and don’t have time. In six months it’ll feel normal and I won’t understand why I didn’t do it sooner.

I’m going to put this bluntly, but many of the business owners we deal with want to build a better business, but never do. They push back on what could be, preferring what is. That needs to change. They need to create the space to make the change. Others don’t know what to change – we’ve got the practical tips on what you could change today coming up soon.

“I’m just a small business” is what we often hear. It’s used as an excuse for pushing back. I don’t have the time, resource or inclination. Being a small business is no excuse for building a better business. That excuse needs to change.

What your business values up at

More often than not, a business is valued based on (1) how much the business earns, and (2) a “multiple” of those earnings.

On the profit side, we’re trying to work out how much the business actually earns. This is after we strip out things which have gone through the business for tax which maybe shouldn’t have (like home office), and expenses which haven’t gone through the books but haven’t. For example, you might pay yourself a low wage as the owner of the business, when a fair market salary is higher.

Once these adjustments have gone through, then you should have an idea of how much profit your company earns on its own (i.e. independent from what the business should pay you for your work at a fair market salary).

We’re then multiplying that profit by a certain number of times annual profit that a buyer is willing to pay for the business.

For example, if the business makes $200,000 per year, and you’re paying a 2 times multiple, then you’ll pay $400,000 for the business. You’re also saying you’ll need to run the business profitably for 2 years to get your cash back (before worrying about interest on your loan to buy the business and tax).

In general, the better a business is run, the higher the multiple. The fundamental strength of systems, staff, production, industry trends etc. is the core driver of the multiple. A business which isn’t saleable (like many in New Zealand) is 0, while the multiple of the flying unicorn is upwards of 8.

But…

The value of a business doesn’t necessarily equal the price it’ll sell for. If you think of the property market, a property valuer will value the property based on recent sales in the area with an allowance for the particular features of the property. Valuing a business is no different – the price paid is only what someone’s willing to pay – the value is based on the business’s profit and fundamentals.

But I can’t sell my business, can I?

All too often we hear business owners say they can’t sell their business. We completely disagree. They might be correct saying they can’t sell it today, but they definitely can in the longer term. We’ve seen all sorts of businesses sold, from manufacturers, wholesalers, bars and restaurants, importers, mechanics, builders, plumbing companies and more.

Every business is saleable. The proceeds from it are (generally) tax free, making it the cheapest money you’ll ever earn.

The key is to start the process of selling your business now, even if you’re not wanting to sell it for five years. The sale process, if done properly, takes time. So, the best time to start selling your business was either five years ago (and sell today), or start today (and sell in the future).

 
If you’re wanting to sell now, get our 3 week email series to cover when to sell, who to sell to, how much to sell for and what the process looks like.
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