by Justin A. Goodbread, CFP®, CEPA®, CVGA®, owner of FinanciallySimple.com, and author of “The Ultimate Sale: A Financially Simple Guide to Selling a Business for Maximum Profit“
So you’re at the beginning of your new business? Good for you! Right now, I’m sure you see the world at your feet and mountains as movable. You’re ready to charge hell with a water pistol. Now – the beginning of your business – is the best time to think about its end. You see, inevitably, you will leave your business at some point in the future. Eventually, your business will dissolve, a buyer will purchase it, or I hate to say it – you can no longer work.
You aren’t embarking on this journey, hoping that it will eventually shut its doors. You are starting a business hoping to amass great wealth, to create a legacy for future generations, or to make a difference in the world. It just makes sense that the business should carry on without you.
The problem is that most business owners work IN their business, not ON their business. The mistake of not thinking of the business as a sellable asset leads to 80% of owners not being able to sell it or selling for much less than they need for their retirement.
Good news, the beginning is a great time to start building a sellable business. Rather than focusing on monthly sales or profits alone, you must focus on long-term value growth that will eventually attract investors and buyers. And these value growth strategies often make your daily business life easier.
Ultimately, to make your business sellable, you must make it:
- Profitable,
- Competitive,
- Scalable,
- Sustainable,
- And Transferable.
By doing those things, you are increasing the value of your business’s intangible assets, which often exponentially increase the value of your company. Therefore, let’s make plans to create a sellable business.
Make Your Business Profitable.
For a business to be healthy, it must be profitable. In other words, your business must bring in more income than you spend on expenses. Remember, profit is not the same thing as revenue, nor does high revenue equal profitability. Although you must earn money to become profitable, if you spend too much of that money, you will never actually “make” money.
To help business owners focus on profits rather than sales, I recommend the 5 x 5 x 5 business growth technique. Challenge yourself to:
- Increase sales by 5 percent.
- Increase gross margin by 5 percent.
- Decrease selling, general, and administrative expenses (SG&A) by 5 percent.
Most often, I recommend that a small business work toward meeting these 5 x 5 x 5 goals over a year period.
Make Your Business Competitive.
Next, you want to make your business competitive in your industry. You must have something or do something unique to draw customers to you right now and to entice buyers to your business in the end. If you have a product or perform a service that no one else in the industry can provide or do, your business will be more valuable than your competitors’ and increase the value of your intangible assets.
Although there are dozens of competitive advantages, you will most likely find yours in your:
- Processes and practices,
- Products,
- Intellectual property,
- Team members,
- Organizational culture,
- Capital,
- Natural resources, or
- Technological advancements
Make Your Business Scalable.
As you are working to build a business that’s valuable to buyers, you want to make it scalable. Your business needs to have a strong enough infrastructure to increase or decrease production as needed while maintaining or decreasing costs. However, just because you can produce 200 widgets per minute doesn’t mean you should always produce 200 widgets per minute. You don’t want to produce more than you can sell at any given time, but you want to be able to produce an enormous amount quickly if and when the market demands it.
You can do that by investing time, energy, and money in your:
- Team members,
- Systems
- Products and
- Advertising
Make Your Business Sustainable.
No matter how wide your profit margins are, how competitive your business is, or how scalable your service is, if your business does not have enough in its cash reserve to survive the inevitable financial storm, selling your business will be a non-issue. In most circumstances, you can predict how much capital you will need with a pro forma (projected) financial statement, and the methodology within that hypothetical calculation applies to almost all types of business. Here’s the process:
- Decide how many years you want to work before you sell your business.
- Calculate anticipated recurring monthly, quarterly, and yearly expenses you will incur during that timeframe.
- Conservatively estimate the gross income you expect to receive during that timeframe.
- Subtract your projected income from your predicted expenses to calculate the shortfall.
That is the bare-bones amount of cash reserves your business will need for sustainability. However, I like to add another 25 or 30 percent buffer into my projected business cash needs. To see an example of a downloadable pro forma along with more details on using this valuable tool, please visit https://financiallysimple.com/pro-forma-financial-statements/.
Make Your Business Transferable.
Finally, for your business to reach its growth potential and attract its eventual buyer, you must take the focus off yourself in your business. In other words, you must build a business that can operate without your daily presence, your knowledge, or your abilities. You want to focus on your team members’ talents and drive them toward success, like a coach instead of the star player. The business that can operate without the owner present 24-7 tends to bring the highest market value at sales time.
To do this, you need to:
- Think of your business as a team effort rather than an individual one.
- Become the coach instead of the star.
- Build the right team of employees.
- Get help from advisory professionals (accountant, CFP, CPA, banker, lawyer, etc.).
- Have your family hold you accountable.
Conclusion.
If you’re starting or running a business without planning how it will end, then you’re not growing one of your biggest retirement assets. Don’t invest your time, effort, and money into a business that is no more than a high-stress day job.
Justin A. Goodbread, CFP®, CEPA®, CVGA®, owner of FinanciallySimple.com, is a nationally recognized financial planner, financial educator, wealth manager, author, speaker, and entrepreneur. He has 20+ years of experience starting, buying, owning, and selling businesses. Justin is the winner of the Investopedia Top 100 Advisor award and Exit Planning Institute’s Exit Planner Leader of the Year. Learn more about Justin’s new book “The Ultimate Sale: A Financially Simple Guide to Selling a Business for Maximum Profit” covering business value growth here.
