We are about halfway through January and if you are like most folks, you are starting to struggle with keeping your 2018 New Year’s Resolutions (NYRs). Whatever your personal and professional NYRs were, we hope that you are extremely successful in reaching those goals!
One NYR we hope every business owner takes to heart and works on diligently in 2018 is the goal of building a “buyer ready” business, or at least getting on the path to this.
Why do we stress this?
Because it is far better for you to exit a business when you want to rather than wait for external circumstances, many of which are well beyond your control, force you to. These scenarios are similar to “fire sales” which according to Investopedia means:
Selling goods or assets at heavily discounted prices. Fire sale originally referred to the discount sale of goods that were damaged by fire. Now it more commonly refers to any sale where the seller is in financial distress. In the context of the financial markets, a fire sale refers to a situation where securities that are trading well below their intrinsic value.
So by its very definition, you want to avoid a fire sale because the buyer is ultimately in control of not just the valuation, but also the terms and conditions of the sale. Which is bad news indeed!
How do you control your exit?
By creating a plan for a buyer ready business and by taking steps in advance of going to market to reduce the risk associated with your company.
How do you do that?
The good news is that you don’t need a PhD or even an MBA to effectively prepare and build a buyer ready business. If you focus on these three areas, you will be making great strides in assuring buyers that your company has a long-term future:
Now granted, each of these will require your time to produce results. But trust us, based on our years and years of experience, if you begin developing a middle management team and delegating key decisions to them, you will improve your standing in the eyes of buyers.
If you drill into the sources of your revenue and create incentives for your sales team to bring new clients on board so none of your clients are over 20% of your revenue, you will reduce the risk associated with your opportunity.
And finally, make the investment in people and software to ensure that you have no gaps in your accounting system. Produce monthly P&Ls and balance sheets that all roll up into a year-end process of reporting that is clean and accurate. By doing this, you will significantly enhance your company’s salability.
OK sounds simple so far…
Now let’s talk about the 800-pound gorilla in the room: Most entrepreneurs love the excitement of founding and growing an enterprise. However, what they don’t enjoy is taking a $5 million revenue company to $25 or $50 million because achieving that sort of growth will definitely require you to focus on the three areas listed above.
But is it worth it?
Absolutely! The difference in valuation between two companies doing $5 million in revenue, in the same industry, where one is “buyer ready” and the other is not can be extreme. And not only the value paid, the structure of the deal can vary dramatically too. If your business is not buyer ready, you may be saddled with contingent payments in the form of an earnout, which may lock you in for 3-5 years working for the new owner to reach the company’s goals.
A great way to learn more about how buyers think about risk and how to mitigate risk associated with your business is to attend a Generational Equity exit planning conference. These highly educational meetings are presented by serial entrepreneurs for other serial entrepreneurs.
Trust me, you will learn a significant amount about exit strategies, company growth, and what it takes to build a buyer ready business by attending. Here is what a few of our clients feel about the conference they attended:
If you are interested in expanding your understanding of how to make your company more attractive to buyers, contact us at 972-232-1121, or reach out to us on our contact page and we will be in touch. If you would like to see if we are going to be holding a conference in your area, please follow this link to look at our schedule.
And good luck with all your New Year’s Resolutions, but especially the really important one: Building a buyer ready business.
By Carl Doerksen, Director of Corporate Development at Generational Equity.
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