What can I sell my business for?

We get asked this question on a fairly regular basis. The simple, if trite, answer is "whatever someone is prepared to pay for it". However, this does not help the debate much.

For those with a larger business (£50m+ turnover) there are several established, formula based ways of calculating a value, usually with reference to a multiple of earnings, which is set in relation to the market place in which you operate. This however, does not assist most of us with smaller, more parochial businesses.

For the smaller business, any purchaser is principally looking at the future profit stream he is buying to get some assessment of the goodwill value and adding this to his estimate of the fixed asset value. (The fixed assets in fact often amount to the purchaser's insurance policy - ie the minimum it is worth). The important point here is that a business owner can do many things to maximise the future value of this goodwill element, but that it is no good trying to do this in the six months running up to a sale.

Everyone will have to leave his or her business at some time, so why not plan for it?

Running your business every day as if it were being groomed for sale creates long term business value. Every buyer wants to obtain a 'turn key' operation i.e. everything is set up for him to walk in on the first day and continue trading.

It is not possible to ascribe a particular uplift to the value of your business' goodwill based on one or more of the factors listed below, as the goodwill value is the most subjective part of the buying decision, and the sum of many parts. But getting these business development issues right will give you both a more enjoyable and saleable business.

A few of the areas you will need to consider:-

1. Does the way the business operates, give it competitive advantage - or is just like other firms in this market? (business model)
2. Does the staff share/understand this company ethos?
3. Is the business wholly reliant upon its owners? (deeply unattractive)
4. Do you have documented ways of doing things, or does the business rely on good luck or the commitment of the staff to get a result?
5. Do you have systems in place to monitor areas that are critical to success (eg phone calls/sales conversion)?
6. What is the cash-flow/generation of the business? Will there be a big funding need?
7. What is the trading record like? Can it be improved or tidied up?
8. Do you have experienced staff?

Will the new owner be taking on any onerous liabilities?

To expand upon some of these:

Business model

It sounds fancy stuff, but is probably the biggest reason why many business just survive and never achieve the objectives the owners had when they set out.

By way of example, if a group of 10 final year students all decided to set up as hairdressers in a town, their typical response would be for them all to hire staff, take premises, advertise etc. probably in ways which were little different from each other. All things being equal, they will probably end up with an equal share of the available business in the town. If this isn't enough to sustain them, then they will usually resort to a price-cutting spiral to get a greater share of the business. Contrast this to the one maverick out of the group who decides, at the inception of the business, to find out exactly what her clients want and devises a way of doing business to meet this. This business is likely to capture the lion's share of what is available.

The key point is that the real product of these businesses is not haircuts, or beefburgers (in the case of McDonalds) or wines (Oddbins), but the way it sells to, and deals with its customers. Please read that again, it is a vital point.

At the risk of being sued, the McDonalds' product is not particularly remarkable. Why then, do nearly all of its franchises succeed (as opposed to the 80% of small businesses that have failed by year five)? The answer is that the McDonald franchisees have bought a way of doing business that is successful (flipping burgers at a set time, layout of the shop, dialogue used by the staff, signage etc). Their business model is particularly relevant to the fast food market they service.

So how do you relate this to your business and enhance its sale value? Is it just like the rest, or is some way in which it does business particularly relevant to the marketplace it serves? What is your unique selling proposition? You are not allowed to use the words 'customer service ' in your reply - everyone has to be good at this nowadays. If you can't answer this immediately, then this needs to be developed before sale. It is the difference between an average performer and a shooting star.

The effective business model also has the secondary effect of improving another valuable part of the asset for sale - the quality of your business customers. Quality customers tend to be attracted to well run firms. If you can show a potential purchaser that your client base is made up of high value clients who buy from you regularly, at high margin, and are loyal advocates, then you have a valuable asset. Contrast this with the business which has high client turnover, customers who are price sensitive (because they cannot perceive any difference in value between you and a competitor), and little repeat purchasing.

Do the staff understand and share the company ethos? (and are they effective)

The best business model and plan will fail if it is not followed, heart and soul, by the people employed in the business. This is obvious stuff, but becomes increasingly hard to deliver, the larger the organisation.

A businesses people policy is crucial to success because it is only the people, and their interaction with others, that make the difference. Few of us can remember what we paid for our last meal at a restaurant or a hotel we stayed at, but we can remember how we were dealt with.

The owner of a successful and valuable business will always have taken the time to make sure his team understands the reasons for doing their work as part of the business model, a reason that is probably more important than the work itself. The team will share and understand the business model and be prepared to do their part. Their work is not just a job, but has meaning within the overall business model. (UPS 'consider it done'). To get to this stage, the business owner has to take the product of the business seriously and take the time to explain it to the people he employs. He must also always be the living embodiment of this reason why he is in business.

So when you come to sell, what is the potential owner buying in terms of staff assets? Is it a bunch of time served individuals whose motivation is just the money you pay them each week, or do they share a passion, your passion about the business? The latter is not an easy state to achieve. Can your team explain easily what your business is about and the way you do it? Go and ask one of them now. If they look at you blankly, there is work to do.

Reliance upon the owners

It is unfortunate, but most small business end up as just a reflection of the owner. They give the owner a job and little more.

It’s a myth to even suggest that most businesses are started by entrepreneurs. Most businesses are started by a person suffering from an 'entrepreneurial seizure'.

Think about how true that is. The hairdresser who’s working for a hairdresser gets fed up working for a boss and opens a hairdressing salon and, in so doing, she creates a job for herself. In truth, probably a worse one than she had before.

Where, in the past, she used to go home on Friday and enjoy the weekend, now she’s doing the books, thinking about the new advertising campaign, paying payroll tax, getting involved with the fact that one employee doesn’t like working with the other and vice-versa, worrying about what her prices should be, and worrying that a new salon just opened across the street.

What was once a 40-hour-a-week job has now turned into an 80-hour-a-week grind.

This doesn’t happen only to hairdressers - the butcher opens a butcher shop, the plumber opens a plumbing business, the mechanic opens a car repair shop, and so on.

Instead of creating a business that works, we create a business that is us. A business that often becomes all-consuming. And worse yet, when it all becomes too much, we sell our most precious asset for far less than it would have been worth if we had started with the end in mind.

“Most people work IN their business. The secret is NOT to work in it, it’s to work ON it so that you don’t have to work in it.”. M Gerber - The E myth Revisited

So what is the secret of working on the business as opposed to in

DUCKETT

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