The question of how to build a sellable business may not be keeping you up at night. So many pressing matters vie for your attention every day. How do I attract and retain good employees? How will I increase sales next quarter? How can I spend more time away from my business to enjoy time with friends and family?
What if the question of how to build a sellable business could actually give you the answers to some of your most vexing issues as a business owner? While there’s no silver bullet that turns running a business into bliss, building a sellable business may be the closest thing to it. In fact, owning a sellable business comes with a whole host of short- and long-term benefits.
In this article, we’ll discuss the qualities of a sellable business and why it’s important to own a sellable business, even if you have no current plans to sell. We’ll also offer some tips on how to build a company that will defy the odds and sell, if and when the day comes.
Characteristics of a Sellable Business
Every small business is different on some level. Even two Subway franchises located just miles apart can be different in terms of their customer demographic, traffic, and financial performance. Yet all businesses are very much the same when it comes to the fundamentals of what makes one business a perennial success, and what dooms another to failure.
Regarding the latter, the same characteristics top every list of why small businesses fail: 1) poor leadership, 2) mismanaged cash flow, 3) no business plan, and 4) no viable market for the product or service. Every. Single. List.
Likewise, highly sellable businesses – meaning those that attract the interest of serious buyers and command strong valuations – have all or many of the same characteristics.
A Sellable Business Has Transferable Value
If you’re unfamiliar with the term transferable value, it may sound like redundant business brokerage jargon. But transferable value is a critical concept to understand and embrace if you intend to sell your business at some point.
If you own a successful business and have generated significant personal wealth from it over the years, you may assume that your business has value. And to you, the current owner, it certainly does.
But will your business have the same value to a new owner? Put another way, will the value that you’ve derived from the business successfully transfer to a new owner when you’re gone? Just because you pay yourself $500K a year in salary and distributions does not mean your business will have the same transferable value to a new owner.
If there is no transferable value in your business, then it is typically unsellable. In this case, your best and perhaps only exit strategy is to wind down the business and close it when you’re ready to leave. Regardless, the options for any sort of business sale will be limited at best.
Sellable Businesses Have Specific Value Drivers
If you’re going to build a sellable business, you’ll want to focus on value drivers that have universal appeal to a wide array of prospective buyers. Whether it’s private equity, a strategic buyer, or even an internal buyer candidate, there are certain value drivers that are considered the gold standard by prospective buyers:
- Business is not reliant on the owner
- Solid senior management team in place
- Low or no customer concentration
- Low or no vendor concentration
- Consistent and reliable financial history
- Trustworthy and transparent financial reporting
- Key financial metrics trending upwards
- Documented systems and processes
- Margins above industry averages
- Repeatable sales and marketing processes
- Recurring or highly repetitive revenue model
- Future growth potential and scalability
What do all of these characteristics have in common? They address the potential risks that buyers analyze in a mergers and acquisitions (M&A) scenario. At the heart of each value driver is a way to de-risk your business as much as possible. The less risk your business has, the more sellable it is – and the more buyers will pay by assigning it a higher valuation multiple.
Why Building a Sellable Business Matters
Buyers try to expose risk in a business in order to protect their investment. As owners, we often become numb to the daily risks (known and unknown) associated with owning a business. In addition to making the business worth more to prospective buyers, building a sellable business reduces current and future risk for the business owner.
One of the long-term benefits of owning a sellable business seems obvious but is quite elusive: You will own a business that you can actually sell, a feat few entrepreneurs ever achieve. A sellable business also has the happy side effect of making vast improvements to both the business itself and the business owner’s lifestyle.
The Odds of Successfully Selling Are Against You
The odds of successfully selling a small business are shockingly low: Only about 20% of the businesses that are taken to market complete the business sale process. Most of us wouldn’t take those odds if given a choice. Yet the majority of business owners do just that by dismissing business sellability as unimportant, or something that can be put off until a later date.
One of the primary reasons that so many businesses end up not selling is due to a lack of planning by the business owner. There is a popular misconception that the process of selling a business is similar to that of selling a house: You just call a business broker when you’re ready to sell, they list it, and the buyers come running. If only it were that easy!
In reality, it can take months or even years to properly prepare a business for sale. If you build a sellable business well in advance, you can avoid being another dismal statistic. In short, if you do decide to sell, you will be able to sell.
The other problem with putting off the question of sellability until you’re “ready” is that when you’re “ready” often means you are emotionally ready to move on from your business. If you wait until you’re emotionally ready to sell, then find out it will take months or even years of preparation, will you have the energy to stay and get the work done? In our experience, the answer for most business owners is no.
Selling to an outside buyer is the preferred exit strategy for the majority of small business owners. Just because you’re not thinking about it today doesn’t mean you won’t want to pursue a sale in the future. There’s no reason not to build a sellable business now. Knowing you own a sellable business also puts you at an advantage if you ever get an unsolicited offer to buy your business.
A Sellable Business Is Simply a Better Business
We can think of at least three reasons why sellability makes both the business itself and the business owner’s life vastly better. If you can find a reason not to build a sellable business, let us know.
A Sellable Business Is More Profitable
A few of the characteristics of a sellable business mentioned above include having strong financial controls, above-average margins, and consistent or improving financial trends. The result of building sellability into your business is that it becomes more profitable. Buyers focus on profitability metrics like gross profit, net income, cash flow, and earnings before interest, taxes, depreciation and amortization (EBITDA). Owners can sometimes get fixated on topline revenue numbers. Building a sellable business forces you to focus on improving profits. What’s not to like about that?
A Sellable Business Is More Enjoyable to Own
While you may see yourself as an asset to your business, prospective buyers view owner-reliance as a massive risk. Buyers want to know that your business will continue to run successfully once you’re no longer at the helm. Any business broker or M&A advisor will tell you that a business with an owner who is “operationally irrelevant” is highly sellable.
The primary antidote to the issue of owner-reliance is to hire a layer of senior management to run daily operations at your business. Businesses that have no senior management between the owner and frontline employees are difficult to sell, or force buyers to tie the owner to a long post-sale transition period.
Here’s a quick test of your operational irrelevance: Can you go on vacation for four weeks without the wheels falling off your business? If not, you’ve got some work to do. The longer you can be away from your business, the more sellable it will be.
A Sellable Business Gives You Options
At the risk of sounding like Captain Obvious, things change. Life has a tendency to throw us curve balls – good, bad, and otherwise. Business owners are like everyone else. Our priorities shift. Unexpected opportunities and challenges show up in both our business and personal lives. Nobody has a crystal ball.
If you own a sellable business you have the option to leave ownership behind, cash out, and move on for whatever reason. If you get an unsolicited offer from a strategic buyer, you know you can sell (and what your business is worth). If your industry changes in a way you don’t like, you can sell. If you want to leave your business for health or personal reasons, you can sell. In other words, you’re never “stuck” in a sellable business.
8 Simple Ways to Start Building a Sellable Business Today
If you build a sellable business not only will you have a much higher probability of success when you’re ready to sell, you’ll enjoy a number of benefits in the meantime. Here are eight easy ways to get started building a sellable business.
#1: Get a Business Valuation
A business valuation is ground zero for building a sellable business. It will tell you what your business is worth to a buyer today, and what is both enhancing and detracting from business value. A business valuation will provide you with the roadmap for how to make your business more sellable (and more valuable) going forward.
#2: Find a Business Broker
Business owners rely on a team of advisors at every point in their journey. One advisor that needs to be on that team sooner rather than later is a business broker or M&A advisor. They know how buyers think and act, and aren’t afraid to tell owners what buyers will love (and not love) about their business.
The best business brokers set the owner’s expectations accordingly, and help them prioritize and achieve their goals for a future sale. Many business brokers and M&A advisors also do business valuations.
#3. Take a L-O-N-G Vacation
As mentioned above, vacations are a litmus test for how sellable your business is. If you normally only take a week at a time, try being gone for two weeks … or three. Go ahead and book that vacation; the longer the better!
#4. Start Benchmarking
Buyers will typically pay more for a business that has margins and financial metrics that outperform the industry averages. If you’re a member of a trade association for your industry, they most likely publish this information on an annual basis. You can also find industry data from research firms that buyers use, like IBISWorld.
#5. Get a Marketing Audit
One of the first things a serious buyer will do is see how your business looks in the marketplace, then compare that to your competitors. If your marketing efforts have been languishing, now is the time to freshen things up – especially when it comes to digital marketing and your company’s online presence.
#6. Hire a Sales Team
One of the main concerns that potential buyers have is how your business gets new customers. Many owners are the primary rainmaker for their business. If you want to build a sellable business, you’ll need to delegate sales to a dedicated team, or be prepared to be tied to your business long after you’ve sold it.
#7. Document Processes and Procedures
This is a great area for getting employee input and involvement. In fact, one owner we worked with had employees choose and implement new tools and systems to capture all workflows at the business. Think of your business like a franchise. You want to be able to hand everything needed to run it to a new owner – like a business in a box.
#8. Locate a CFO For Hire
Many businesses are too small to have a CFO on staff. Fortunately, there are many CPA and outsourcing firms that allow you to hire a CFO on an as-needed or temporary basis. They will help get your books in order, and dig deep into the financial performance of your business – in much the same way that buyers will.
Why Not Build a Sellable Business?
If there’s a good reason not to build and own a sellable business, then we’re not aware of it. We hope this article offers ample motivation to build a sellable business well in advance of your plans to sell, or even if you don’t have any. The advisors at Allan Taylor & Co. are ready to start the conversation and help you get started today.
Barbara Taylor is the co-founder of Allan Taylor & Co. You can connect with her on Twitter @ballantaylor and LinkedIn.
