BY KEN LUCCI
Have you created a lifestyle job or are you building an asset you can sell?
Entrepreneurs are motivated to own businesses for a variety of reasons, usually starting with a passion for providing a product or service with the belief that it will become a major source of income. Some people start businesses because they don’t like the restrictions of 9-to-5 jobs; they want the freedom to make their own schedule and have more control over what they earn. In addition, most owners think their business will be a solid path to creating personal wealth and a secure retirement with its eventual sale. Many with this mindset even sacrifice their own W-2 income throughout the years, taking meager wages that are not commensurate with hours worked or financial risks incurred. These owners are the last to be paid, thinking someday they will make up for it when they “cash out.”
Unfortunately for these owners, fewer than three out of 10 small businesses ever sell to third parties, according to the International Business Broker’s Association. The simple fact is that many small businesses do not evolve to the point of becoming a sellable asset with desirable attributes to attract qualified buyers, even if the company has been successful.
Many times, when operators engage us to sell their transportation businesses, we ask several financial and operational questions, quickly reaching the conclusion that their business is not currently in the condition to sell to third parties. After we ask a few more questions, those operators are usually further disappointed when we give them a rough idea of what to expect for offers and transaction terms based on their current situation.
Many operators are also under the misconception that anytime they want to sell, there will be a line of suitors around the block waving blank checks to pay them whatever they ask. Unfortunately, that is not the case, because there are very specific elements that make a business a sellable company.
First of all, even the best-run businesses are rarely in the condition to sell immediately when an owner wants to exit. At the very least, financial and operational performance must be reviewed and, chances are, some critical elements should be improved before offering the enterprise for sale—especially if the goal is to achieve maximum value and a timely transaction. All businesses require extensive preparation in order to be ready to present professionally to potential buyers.
More often than not, operators who think they have an attractive enterprise to sell are sadly mistaken because their business is missing several critical characteristics that make it a company a qualified buyer would consider purchasing.
Owners then have two choices: 1) improve the performance of the business over time and start the sale process later, or 2) keep the business until they get tired of it and simply wind it down, meaning liquidating it by selling the assets off piece by piece.
I am not inferring these businesses are failures—to the contrary, in fact. These enterprises have served their purpose for the founders: they have created a job, an annual income, and a decent lifestyle. However, in many cases, these businesses have not evolved into sellable companies. Unfortunately, people don’t usually want to purchase into a job that requires them to be involved seven days a week to keep revenue coming in, especially if they must invest lots of capital upfront or incur long-term debt for that privilege.
These fundamentals must be present:
A. Consistent Profitability: Three recent years of greater than 10% net profits after paying all expenses, including substantial owner income
B. Operational Efficiency: Systems and people in place to run the business every day without constant owner involvement in major functions and processes
C. Growth Potential: The ability to increase revenue significantly while keeping operating costs relatively stable, thereby producing significantly more profits
D. Longevity and Sustainability: A history of continuous growth and profitability with the likelihood of continued resiliency and financial stability
E. Superior Return on Investment: Measures the ongoing risks of operating against capital, time invested, expected profits, and increases in enterprise value over time
Most importantly, the above attributes should not be diminished if the owner is uninvolved in the day to day or exits the business completely. A business that operates effectively and produces profits without the owner’s involvement in major daily functions has likely evolved into a sellable entity.
Sellable Companies Have the Following Characteristics:
❱ Operates Within the Law: This means you are a legal entity in good standing within every jurisdiction the business operates in, and adhere to all other applicable laws.
❱ Employs People Legally: This is defined as a company that employs workers to perform business functions, especially service delivery, adhering to labor laws and regulations. Ideally, the owner should supervise activity and not be the one performing major functions (meaning the business can operate without them).
❱ Complies With Regulations: Obeying laws, government regulations, and industry standards is crucial. This includes permits and licenses, safety, and other governmental compliance.
❱ Strong Financial Performance: This is demonstrated by steady revenue growth, positive cash flow that pays the owner a weekly income, and consistently produces net profits. Demonstrating financial stability including continuous profitability above and beyond just paying owners a wage usually means the enterprise itself has value above the income paid to the founder.
❱ Accurate Financials and Documentation: Businesses with current and historic (well-organized) financial records—long with professional financial practices—are appealing to buyers. Accurate financials and consistent profitability instill confidence in banks and buyers.
❱ Operating Systems and Experienced Management and Line Staff: A well-operated company maintains written processes, policies, procedures, and practices, and the enterprise is efficiently operated by an experienced team, not simply the owner or founder.
❱ Scalability Potential: Businesses that are sellable can quantify where they have the potential for growth and expansion, capitalizing on the systems, people, and assets already in place with only incremental investments of capital over time.
❱ Diversified Services and Customers: Companies that offer many vehicle capacities, a variety of services, and many and various customers are less risky to acquire than businesses that rely on a few clients for a large percentage of annual revenue. If your biggest customers are affiliates, this revenue is much less valuable, making it a risky company to acquire. A diverse customer base also provides stability during economic downturns or disruption.
❱ Strong Market Presence and Stellar Reputation: A well-established brand with a positive reputation in the market as evidenced by hundreds of positive customer reviews is more valuable than an unknown brand or a company with bad reviews and a poor reputation.
❱ Sustainable Structure: A company with strong financial performance, solid internal systems, and qualified personnel in all major functions is more likely to have longevity than a business that is dependent on the intense involvement of the owner on a daily basis. These attributes demonstrate to buyers that the business is sustainable and has growth potential and will likely survive and even thrive under new ownership.
Every entrepreneur likes to think that they have more control over their destiny as a result of owning their own business. That is a serious responsibility that comes with being your own boss. If you believe part of your destiny is selling that business in the future, then it is wise to prepare for that eventuality long before you want to sell.
Building your enterprise into a strong and profitable company that possesses all the fundamentals and characteristrics discussed above is within your control; you are the one that ultimately decides whether your business becomes a sellable asset or, in the end, you have just created a job and a nice lifestyle. [CD0525]
Ken Lucci is the principal business analyst and founder of DrivingTransactions.com. He can be reached at klucci@drivingyourincome.com.