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!
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
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!
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