I was given the opportunity to contribute a Guest Commentary to this week’s edition of the Northwest Arkansas Business Journal. Following is the original version of my article addressing one of my favorite topics: managing your small-business as if it could be sold at any moment.
If you were born after 1964, you’ve probably gotten used to riding shotgun alongside the Baby Boom generation. Each stage of their lives has introduced us to an onslaught of new products, trends and discoveries. From Burger King to Beatlemania, the Baby Boomers have been the most influential population group in history.
And now they’re starting to retire.
10,000 Baby Boomers turn 65 in the U.S. every day, which means we’re about to witness the largest generational transfer of wealth in human history — over $30 trillion according to a 2012 Accenture study. For Baby Boomer business owners, much of that wealth currently resides in the equity they’ve built in their privately-held companies. As Baby Boomer business owners begin to grapple with the notoriously difficult task of turning years of hard work into a big payday, discussion around exit planning and selling your business has gone from the topic of hushed conversations to headline news.
There’s nothing new about the need to plan an orderly, and ideally lucrative, exit from one’s business. Whether it’s in the form of a splashy I.P.O or a quiet sale to a local competitor, every business owner will be making an exit at some point. Yet most owners put little to no planning in place when it comes to their exit, or worse, they wait for a trigger event to force the issue. Ironically, keeping the end game in mind can not only protect the investment you’ve made in your business over the long-term, it can also provide immediate rewards.
Here are three reasons to stop thinking of sellability as something to address “some day,” and start thinking of it as a smart way to manage your business today.
Sellable businesses tend to be more profitable
If you’re going to build a sellable business, the first thing you’ll want to understand is how businesses are valued. Getting a business valuation can be an eye-opening experience, as it teaches you to see your business from a totally different perspective: a buyer’s. As you discover what drives overall value in your business, you can focus on making improvements in the areas where you’ll get the most bang for your buck when and if you sell. Common value drivers tend to be a strong management team, low customer concentration, having solid processes and systems in place, accurate and timely financial reporting, and a solid track record in terms of both sales and pre-tax earnings.
Sellable businesses tend to be more enjoyable
As mentioned above, one of the hallmarks of a sellable business is that daily operations no longer depend on the owner’s involvement. In the parlance of business brokers, the owner has become “operationally irrelevant.”
Here’s a quick test of your operational irrelevance: Can you go on a two-week vacation without any of your employees calling you? If the answer is “no,” you’ve got some work to do. If your answer is “yes,” take a three-week vacation next time.
One of the downsides of business ownership is that it can quickly consume you. Many of us start businesses with grand plans of having freedom over our time and control over our destiny, only to see them vanish under a constant barrage of fires to put out. While it can be difficult to delegate, having a strong team of managers between you and the front line of your business is an important part of the sellability equation.
Sellable businesses give you options
Life is filled with transition and change — good, bad and otherwise. I started a business with my husband and ran it for three years before realizing that we didn’t much care for the industry and sold it to someone who did. Business owners are like everyone else. We get the urge to move or tackle new opportunities. We get tired, sick, bored, have grandkids, retire or simply realize that it’s time to start the next chapter in our lives. If you own a sellable business you have the option to leave ownership behind, cash out, and move on. No one likes feeling stuck in their business, yet that’s often what ends up happening. If your business is sellable you always have the option to get unstuck, when and if the need arises.
There’s an advantage to going behind a demographic juggernaut like the Baby Boom generation. While we didn’t need Jane Fonda workout videos to know that daily exercise is important, the Baby Boomers helped transform fitness from an activity to a lifestyle. Likewise, successfully exiting a business has always been an important part of the journey of entrepreneurship. It may take watching Baby Boomers retire to make us realize just how essential it is.
Author: Barbara Taylor
Barbara is co-founder of Allan Taylor & Co. and a former New York Times blogger. She has been a small-business owner since 2003. Barbara lives with her husband, Chris, and their two sons in Northwest Arkansas.