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Finweek English Edition - - MONEY - FI­NANCE FOR EN­TREPRENEURS By Gareth Ochse

Sell­ing your busi­ness is when things hope­fully come to­gether for you: all the hard work over the years is rewarded – you pocket a wad of cash and ride off into the sun­set. This should hap­pen if you’ve done all the home­work and made your busi­ness as saleable as pos­si­ble. In this ar­ti­cle we con­tinue to look at some of t he t hings you need to do be­fore you sell.

RE­DUCE RISK, ES­PE­CIALLY CON­CEN­TRA­TION:

Most small- and medi­um­sized busi­nesses (SMBs) suf­fer from con­cen­tra­tion risk, par­tic­u­larly in the ar­eas of sup­pli­ers, cus­tomers and prod­uct line. A busi­ness that has a great re­la­tion­ship with a sup­plier for five years might think that all is well, but would quickly learn the op­po­site when the sup­plier changes terms, is bought, or goes un­der. Hav­ing only a few cus­tomers or sell­ing only a few prod­ucts car­ries sim­i­lar risk: things change, re­la­tion­ships change and when they do, your abil­ity to price of­ten goes out the win­dow and the value of your busi­ness goes along with it. So a key step in pre­par­ing your busi­ness for sale is to re­duce con­cen­tra­tion risk in th­ese ar­eas. Ac­tively seek out al­ter­nate sources of sup­ply. Make sure you have sev­eral sup­pli­ers that you can buy from. Ac­tively seek out new cus­tomers, and di­ver­sify your prod­uct range. It’s highly un­likely that you’ll be at­trac­tive to a buyer un­less t hese risks are al­ready di­ver­si­fied.

MAKE YOUR REV­ENUE PRE­DICTABLE:

You want to turn your busi­ness into a money-mak­ing ma­chine. You must get t o t he point where you wil l know that if you in­vest $100 to­day, it should spit out $150 or more in a few days’ or weeks’ time. Then you can make a call as to how much you should in­vest now and how much re­turn you should ex­pect in a spe­cific time frame. More im­por­tantly, the buyer of your busi­ness can see this too and will quick ly un­der­stand the op­por­tu­nity. To get this in place you need to in­vest in mar­ket­ing sys­tems: iden­tify your tar­get mar­ket − un­der­stand how it buys and how it makes pur­chase de­ci­sions. Make sure you tick off each box. Show what cam­paigns you’ve tried and what their suc­cess rates have been. Track the en­tire sales process, gather feed­back along the way and en­sure you know your Net Pro­moter Score. Th­ese sys­tems all take time and pa­tience to set up, but t hey’ l l give you a far bet­ter idea of whether you should be sell­ing your busi­ness at all, and if you still de­cide to, it will help a buyer un­der­stand the value of what they’re buy­ing.

RE­MEM­BER THAT THE BUYER HAS MANY CHOICES, BUT SO DO YOU:

If you want to sell your busi­ness, you need to stand out from the oth­ers that are also for sale, and there are many. Luck­ily

most of them are re­ally not worth much, so if your busi­ness is well run, if the sale is well pack­aged and pre­sented, and if you’re not in a rush to sell then you’ll im­me­di­ately be in the top 5%. The buyer will hope­fully have looked around and de­cided that your busi­ness is the one, but more likely they’ll be cheeky with the a sk i ng pr i ce a nd back of f un­less con­vinced they’re get­ting a bar­gain. If you’ve done your home­work, and taken the ef­fort to get a proper dis­counted cash f low (DCF) val­u­a­tion, then you’ll eas­ily un­der­stand whether it makes sense to take a par­tic­u­lar of­fer or keep the busi­ness be­cause you’ll know what it’s worth to you in cash terms. You’ll also be able to show this to a buyer to jus­tify your price. Pre­par­ing early and prop­erly are key steps to­wards keep­ing your op­tions open and mak­ing the pur­chase of your busi­ness the only re­ally good op­tion for the buyer. SELL­ING TO A STRATE­GIC BUYER VS FI­NAN­CIAL BUYER: You’ll al­most al­ways make more

money and sell your busi­ness in less time by sell­ing to some­one in your in­dus­try (or one ad­ja­cent to it) than a purely fi­nan­cial buyer. The rea­son has to do with both bet­ter un­der­stand­ing of the busi­ness by the buyer (i.e. they more ac­cu­rately price the risks in­volved be­cause they know them al­ready), and that an in­dus­try buyer can prob­a­bly re­duce costs by shar­ing sales ef­forts, dis­tri­bu­tion fa­cil­i­ties or some other cost with their ex­ist­ing busi­ness. The corol­lary to this is that an in­dus­try buyer will prob­a­bly al­ready know whether your busi­ness is a good one or not. They will have been your cus­tomer, sup­plier or com­peti­tor for years. This is how ‘walk-in sales’ hap­pen: an in­dus­try player ar­rives at your door one day and asks if your busi­ness is for sale, en­tirely out of the blue. What this means is that you should al­ways be ready to sell and have an idea of how much your busi­ness is worth. DOC­U­MENT IN AD­VANCE: Well-run busi­nesses sell more eas­ily than poorly-run busi­nesses, for ob­vi­ous rea­sons. A well-run busi­ness wil l have s ys­tems i n place and it s doc­u­ments in or­der. So, you need to get your records to­gether long be­fore you plan to sell. Show monthly man­age­ment ac­counts, board meet­ing min­utes, mar­ket­ing plans and re­sults, an­nual reg ula­tor y ret urns, t a x c l ear­ances, con­tracts and in­sur­ances, in­clud­ing your l e a s e a nd e s c a l a t i on t e r ms, k e y em­ploy­ment con­tracts, dis­ci­plinar y no­tices, etc. Get ev­ery­thing in or­der. Put phys­i­cal copies in a nice big file. Or, even bet­ter, scan them and store the dig­i­tal copies some­where – th­ese are far eas­ier to share with prospec­tive buy­ers and you’re less at risk from some­one los­ing the file. Get­ting this stuff to­gether in ad­vance will be to your ad­van­tage – you’ll be able to an­swer any ques­tion about the busi­ness al­most im­me­di­ately too, which it­self makes the busi­ness more at­trac­tive. GET A REG­U­LAR, IN­DE­PEN­DENT VAL­U­A­TION OF YOUR BUSI­NESS: Re­search shows that busi­nesses that have been in­de­pen­dently val­ued sell far faster – the rea­son for this is that the price is more re­al­is­tic from the start, and also that a skilled, qual­i­fied per­son has cast their eye over the busi­ness al­ready. The other main rea­son to get a reg­u­lar val­u­a­tion is that the DCF value of your firm is an im­por­tant tar­get against which you can in­cen­tivise staff and de­ploy re­sources. The re­sult is that they are shoot­ing in the dark, un­der­per­form­ing and achiev­ing lower sell­ing prices as a re­sult.

Gareth Ochse is founder of Val­u­a­tionUp. com – a fi­nan­cial anal­y­sis and strat­egy tool that shows how a busi­ness is be­ing run, what it’s worth, what it could be worth and how to get it there. Email fin­week@val­u­a­tionup. com with any feed­back/ques­tions.

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