Profitability

Dec

2020

Why would anyone want to buy YOUR business?

To sell your business for top dollar tomorrow, you must start planning today!

Everyone knows the benefit of owning their home. You do it so that you pay a lower monthly payment than you were renting a similar place. Then, after thirty years of ownership, once it’s all paid off, you bulldoze it. Right?

If you wouldn’t treat your largest personal asset this way, why on earth would you treat one of your largest professional assets the same? You didn’t build it brick-by-brick (metaphorically) just to dismantle it when it was your time to move on. Sadly, this is the number one, most common mistake I see business owners make. Here’s how you can prevent it from happening to you:

1. Let it grow, let it grow, let it GROW!

Grow your business so you can sell your business at its peak!

I was recently meeting with an RV park owner who told me “when I was younger, it was all about the money, but as I’ve aged, my priorities have changed.” This was his justification for stagnant growth in an industry which just this year saw a 25-50% explosion in some parts of the country. Sadly, his flat line growth cost him, substantially! It changed my offer price to buy his business by 50% of what it could have been.

I will not judge anyone for their priority of friends, family, and relationships over their businesses. I advocate for this and would do the same. That does not mean your business must also suffer. You can grow while also taking a step back. It takes the right people in the right positions. “Mom and pop” operations have a tough time with this one. They often see this as adding one more headache to their lists… managing someone while still running their business.

In reality, the right people, who fit your culture and fit their job will allow you the freedom to move beyond your day-to-day while the business grows. If you missed my article on cultural misfits, I shared a great tool to help you do just that!

2. Don’t put short-term gains over long-term growth

Short sightedness will cause you to sell your business for less — Image credit: Loss Prevention Media – https://losspreventionmedia.com/employees-busted-for-theft-of-cash/

It’s all too tempting to stick it to the man. After all, aren’t they just out to get you? Resist the temptation. The few bucks you’ll save now by writing off your family vacations and paying yourself under the table in cash are not worth it!

I recently analyzed a business I was considering buying and the owners made several comments about how “it’s a cash business.” I could almost hear the wink coming through the phone. Here’s the fatal flaw… No one can buy your business for what it’s worth! Put it this way:

If you own a business that generates $500k in gross income (after cost of goods) and you have an expense ratio of 60%, you are making a cool $200k per year and living well. If you were to sell your business to someone at a 10% capitalization rate, your business would be worth $2 Million! Congratulations!

Let’s say you decided to stick it to the man and you siphoned $20k in cash revenues out of your income and wrote off another $30k in non-business expenses. You may have seen a $50k raise, bringing your annual income to $250k. That’s great… isn’t it? Here’s the problem… that $50k will not reflect in your net income, since some of it never existed and the other was a business loss. Not to mention, your core business expenses didn’t change. It still costs you $300k to make this money and now you can only report $150k of net income. Those cooked books devalue your business by 25% and you are now sitting on a $1.5 Million business. Your break-even point comes at 10 years. Is it really worth risking a tax audit and having to look over your shoulder for a relatively small short term gain?

Be evergreen and live forever green!

With the right people and the right plan, your business will continue to generate income for you long after you have left. I am willing to bet at least half of you reading this right now are thinking that you have nothing to sell and that there is no way your business could go another day if you were gone. Keep reading and send me a message if it still doesn’t apply to you.

Just because you’ve sold it, it doesn’t mean you are gone. You might think you’re just selling some equipment, tools, and maybe even a piece of real estate, but that is not what you’ve spent your years building. You’ve built a client database, systems and processes, and a reputation. These are worth more than all of those tangibles, by far!

Okay, so now you’re going to tell me that your clients have no reason to work with the new owner and so your database really isn’t worth anything. Take real estate agents, where the National Association of Realtors reported that 91% of home buyers stated they would use the same agent again; yet less than 15% actually did. In his book, The Golden Handoff, Nick Krautter leaves a procedure for real estate agents to step out of their role, sell their businesses, and generate passive income. If real estate agents who have atrocious return client rates and no assets can do it, you can too!

Aug

2020

Can you spare 1%? (Hint: it’s for YOU)

“That’s the way we’ve always done it.” In my former life, working in government, often when someone would suggest a new method, system, or principle which a superior was denying, it would be followed with this line. This way of thinking is why many of our government entities are archaic in processes and not able to keep up with the demands of their constituents. This also shows up in private sector businesses as well, because the one thing business owners dislike more than the way things are, is change.

GAAP or Generally Accepted Accounting Principles have taught us that the flow of money through a company starts with revenue, subtracts expenses, and ends with profit. There is a lot more to GAAP accounting and it has undoubtedly created a standard for business accounting and accountability, however, it has also contributed to many businesses being unprofitable.

Profit First, the book by author Mike Michalowicz, describes a fresh perspective for business accounting, wherein you take your profit first and then each of your expenses, in the order of priority. If this sounds outlandish and if you are skeptical, realize, Mike’s method encourages you to be more profitable. That’s it! His motive is for you to pay yourself and then tighten your businesses expenses to live within the remaining revenue stream. We should all be celebrating this, yet I imagine there are still some furrowed brows at the mere suggestion of such a thing. Stick with me… Your light-bulb moment is coming!

Open your profit account

The first step in implementing Profit First is to create a “Profit” account at your bank and immediately fund it with 1% of the balance of your business’ operating account. Surely, if you are like most business owners, you run from one bank account (I had two and though I was savvy). In the full implementation of Profit First, your business will have five bank accounts. Today, we’re starting with just a second account, for profit.

The point to this is that 1% is such a small amount, such a low bar, that you will not notice it gone. Now that you’ve started your profit account, don’t touch it! This is your money and transferring it back to your business is stealing from yourself. You wouldn’t transfer back from your tax account, because that is stealing from the government, so why would you steal from yourself?

Time Block

You’ve heard me preach time blocking before. Your new time blocks will be twice per month to settle your books and pay yourself a profit. Ideally, for simplicity’s sake, these will be the same dates each month, so you’ll know how far back to go. The 10th and the 25th are Mike’s suggested dates. Block these in your calendar on permanent repeat, reminding you to settle your profit account, and then honor that time block. As your profit account grows, this activity will become more exciting!

Grow your profit margin!

In the beginning, you’ll just transfer 1% of your revenues to your profit account. When I say revenue, I do not mean your account balance. That was just a starting point to prime your account. As you move into your new routine, you will take 1% of the total revenues received between your last time block and the current one and transfer it to your profit account.

Rome wasn’t built in a day and a high profit margin can’t be forced in the first month. Industries vary, however, in many serviced based industries, a 40-50% profit margin is considered the gold standard and in manufacturing, 25-35% is considered good. You’ll find your ideal profit margin and I’ll help you set a goal and achieve it, however, you’ll get there through incremental growth. If you transferred 40% of your revenue today, it’s highly likely you’d bankrupt your business.

As time goes, your target should be to increase your profit margin month-over-month. If you did 1% this month, do 2% next month. If you start feeling a pinch from your new profit draws, you have one of two options: raise revenue or cut expenses. Visit your P&L (profit and loss) statement and identify which needs to be addressed. Once you’ve streamlined your business, you can continue to grow your profit margins.

Benchmark and grow!

Profit First uses an Instant Assessment to measure where you are in your business and to set goals for which accounts must grow and which must be reigned in. Take this assessment regularly (at least quarterly) to know where you stand. I’ll post a link to download this tool at the bottom of the post.

This is just an introduction and I hope it has you salivating for more. Profit First is a full business accounting ecosystem to ensure your priorities lie in paying yourself first and increasing your pay as time goes on. If this has piqued your interest, I encourage you to pick up a copy of Profit First, by Mike Michalowicz.

If you need help implementing Profit First or in creating an understandable P&L statement, please reach out. Keep your business lean and your profits fat!

Download the Instant Assessment