Even if you do not want to sell your business if you prepare it so that you could, your current business will improve.
My friend Michael Sipe brought home to me the tremendous difference between building a business vs. having a job working for yourself. Mike is a mergers and acquisitions specialist, arranging and negotiating the sale of (you guessed it) businesses. One of his clients was Bob.
Bob had been very successful for thirty years in corporate America.
All those years he had dreamed of having his own business. When he turned fifty, he took early retirement, cashed in his retirement accounts, and put all his money into starting his own business. His wife, Mary, kept the books and ran the office. Bob was very customer-service-oriented, a big, athletic, can-do kind of guy with huge energy. Every day he was right in the middle of everything, working with clients, staff, and vendors, and having a grand time. He was profiled by a major business journal as an example of a successful entrepreneur.
Bob and Mary planned to work the business for ten years and then sell it for $1.5 million, retire to Seattle to play with their grandchildren and live happily ever after. They were living the American dream with their own business. Everything was perfect.
Except for that one day when Bob woke up and noticed he wasn’t feeling well.
The doctor told him that if he didn’t get out of the business, he’d be dead in six months: “Sell the business, reduce your stress level, and chances are you’ll live a few more years.”
Bob and Mary were referred by their CPA to Michael Sipe for professional advice. Mary was in a panic. Bob, as you can imagine, was devastated. Bob broke down. Mary broke down. Mike, who had never met them before, ended up in tears, too. Bob said, “Mike, I don’t want to sell my business. I LOVE my business. But, I don’t have any choice. Can you help me?”
Mike asked what they planned to do. Bob told him their retirement plan called for $1.5 million, so they needed Mike to sell the business for that amount. Mike examined the business thoroughly and discovered it wasn’t worth that amount — and given how it was being operated, likely never would be.
The problem, Mike told them, was that Bob hadn’t really built a “business.”
He had really just created a “job”, working for himself. He had kept himself right in the middle of things, needing to approve every decision, know every customer, and do everything connected with the business. He’d even named it after himself. He had a dozen employees, so it LOOKED as if he had a business, but in fact, Bob WAS the business.
When Bob couldn’t work effectively anymore, the business didn’t seem to work well either. Revenues and profits started dropping off. Bob hadn’t built a business with any particular value beyond his own participation. Until Mike pointed this out, Bob hadn’t realized it, and no one else had either.
Mike said, “Bob, I don’t know how to break this to you at such a bad time, but you’ll be lucky to get $300,000 for the business.” Bob and Mary had no significant outside money, no safety net for their retirement. Reluctantly, Bob told Mike, “I don’t want to die from stress, and I certainly hope we can do better than $300,000. Please do the best you can for us.”
Fortunately, Mike was able to get four prospective buyers involved in competitive bidding.
He sold the company for $400,000. It was a bittersweet victory. Mike helped Bob leave the business with dignity and transfer it to a new owner who is doing well. Although the company sold for more than expected, it was a far different price than Bob and Mary had dreamed of, particularly after taxes.
The good news is that Bob is alive. Bob and Mary ARE spending a lot of time playing with their grandchildren. The bad news is, its because they’ve had to move in with their children as they can’t afford to live in their own house. And Mary works at a low-paying job, not for pleasure or stimulation, but because they need the money.
“None of this had to happen,” says Mike.
“If only someone had grabbed hold of Bob and told him, ‘You’re not building anything of value here. You only have a job, not a business.”
“This happens more often than you’d think,” Mike explains. “And when it does, the business is rarely worth what the owner thinks it is. If you stopped showing up, how well would your business do? Would it still be going a year from now? In five years?”
A very different situation is typified by Tom, a wiry outdoorsman and martial artist. He started his own business, about the same time Bob did. Five years later, Tom was talking with his martial arts “sensei” (which means “master”). His sensei told him, “Tom, your rice bowl is full.”
“What do you mean?” Tom asked.
“You have a good net worth. Your kids are out of college, you’ve got a house in Saratoga and another house in Palm Springs, you travel around the world, you’re in great health, and you’ve got a good business. You’ve also got things you still want to experience. How much is ‘enough’? Your rice bowl is full. Why don’t you sell your business and go do some of the things you still want to do?”
Tom was referred to Michael Sipe by his banker for advice. “Mike,” he said, “my rice bowl is full.”
“That’s really nice,” said Mike. “So how can I help you?”
Tom explained and said that he’d decided to sell his business and would be happy to get $1 million. Mike evaluated the operation and found a completely different situation from Bob’s. Tom wasn’t managing the business. He was its leader and strategic director. A group of highly motivated and superbly skilled managers and employees ran the company. The facilities were immaculate, the equipment was in great shape. There was a strong balance sheet and no debt. The organization had been consistently profitable. The company wasn’t large, but it was beautifully designed.
Forty-five days later Mike closed the sale of the business for $1.5 million — in cash. Tom is now off pursuing all his other interests. His rice bowl is full.
Mike’s advice to anyone thinking of buying a business is this. If you want your own company, set it up so that you can sell it whenever you want to (or have to). Build your organization so that it has real value beyond your participation.
There are four simple rules for doing this.
- Put yourself in charge of working ON your business, not IN it. Build your business so it can run without you on a day-to-day basis. Break your responsibilities into different functions that other people could perform. Don’t be the only one who can handle certain tasks. Cross-train your employees so that each can handle several different duties when necessary. Hire people with management potential. Then develop them.
- Make sure your business looks good. Appearance DOES matter. A clean, well maintained, attractive company is much easier to sell and commands a higher price than a tired, dirty, run-down operation.
- Get an outside opinion on your company’s value on a regular basis. You get periodic physical exams to assure your body is healthy, doesn’t it make sense to have a professional checkup on the health, liquidity and value of your company?
- Build a profitable company. This point may seem obvious, but many entrepreneurs come to Mike with the belief that simple longevity matters, saying something like, “We’ve been in business for ten years, so our company must be worth $10 million.” Or they think that sales volume determines the price. “Our sales are $3,000,000, so we want two times sales for the company.” When Mike asks about their profits, they reply, “Well, we hope to make a profit SOMEDAY…”Mike’s advice is, “Set financial goals and meet them. If your business isn’t making significant amounts of money right now, it’s highly unlikely you will be able to walk away with anything to show for your hard work.”
- Finally, have an exit strategy for how you plan to leave your business. Don’t just assume everything will work out OK. Seek professional help and develop a viable plan with contingencies. Everyone leaves their business at some time, but unfortunately, as Bob discovered, we don’t always know when.
Even if you do not want to sell your business, consider the lessons learned from Mike’s clients.
Patricia Fripp is hired by companies to help them drive sales by perfecting their important conversations and presentations.