Ending it is an entirely different matter. And ironically, it is the end of a business that is the business end. It is not until you and the business part ways that you will know for sure if you have graduated from self-employed to business owner.
Why is this distinction important? Because the value your business is returning to you when you are working in it is only a fraction of its ultimate value. All those hours and years you are putting into it may, if you are doing that part right, return you a good living. In statistical language, the hours you are putting in, and the dollars you are taking out, have a positive relationship. But that’s not enough. That simple relationship fails on two grounds:
- If that is all there is, there is nothing there for you when you are ready to leave. If that departure is your retirement, how will you fund that?
- If that is all there is, you are potentially leaving thousands or even millions of dollars on the table, and walking away.
A well-designed, well-run business is a value-accruing asset. The owner of such a business draws regular compensation from the business during the time she owns it, but that compensation is just a portion of the ultimate value of the business, not to be realized until it is sold (as a whole or as a franchise or licensing agreement, etc.).
Given the seriousness of the two potential failures I listed above, I am appalled at the number of businesses that are started and run without a profitable end clearly in mind. Why would anyone walk away from decades of investing in something, taking nothing, or a few cents on the dollars it could have been worth?
The Right End Is The Right Start
When you start a business, from the very earliest days you should run it as if it were going to be duplicated in other locations, franchised, licensed to others, or in some other fashion expand in a scale-able, repeatable way. Even if you never do it.
If you design and run your business in this way from the beginning, you will get the maximum possible value out of it when you are ready to wrap it up. And you will have the best possible experience running it while you still own it! This is because the things that increase the value of a business as a saleable asset, are exactly the same things that make it the most profitable and least stressful to run right now.
The Value Building Keys
Here is a brief overview of the things you must make every effort to build into your business from the beginning to get the most out of it now, and in the end.
- A brand. A brand is many things, but in this context it is an extension of the concept of a corporation: an entity that has an identity beyond your own. To the extent to which your business is identified with you, is the extent to which it will lose value when you try to sell it. This is the real litmus test of that over-used and misunderstood concept: goodwill. The primary measure of goodwill is the size of a customer list (if the business even has one). But if those customers are loyal to you as the business owner, then the purchaser has no guarantee that half of them won’t fall off the list the moment he picks it up. Your customers must be demonstrably at least as loyal to your brand as they are to you. The value of a high-profile, front-of-mind brand while you are still in charge, is self-evident.
- A system. If demonstrable brand loyalty is the key to making goodwill a meaningful value, then an SOP (Standard Operating Procedure) manual is the true measure of a turn-key business. Ideally it goes like this: you lock up on a Friday night, give the key to a buyer; he returns on Monday morning, turns on the lights and is instantly productive without any further guidance from you. The closer you get to this ideal the more valuable your business will be. While you still own the business, an SOP manual is critical in areas ranging from profitability to employee training time, retention, quality of customer experience, and many others. It’s not optional.
- High value accounting. Having a few year’s worth of accurate year-ends, hopefully showing a profit, and no nasty liabilities, is good. But it’s just the start. If you can also show that your whole accounting system is a tool that leverages historical information for current intelligence and future decisions, and does so in a straightforward, well-documented way, that is worth a great deal. If you use pro forma statements of cash flow, and document inventory purchase planning, or finely tuned recruiting and compensation plans, your business will be more valuable to a buyer, and probably more profitable while you own it.
- Assets. While a share sale based only on a strong brand and great documented systems can be a very good thing, valuable assets don’t hurt. Well maintained, properly priced assets, especially real property, can add significantly to the value of a business. Even a small business can benefit from this if it owns the location it is in. Great talent on your team is also an asset. I know that this is a risky ‘value’ as there are always concerns about employee loyalty (as there are with your customers) to the new owner. But I maintain that great talent on your team is valuable. If it weren’t there would be no headhunting or poaching. As with brand loyalty, the value of having great loyal talent on your team while you are still the owner, is self-evident.
I work with business to redesign their futures. Want more out of your business? Contact me. From my home base on Vancouver Island, I provide planning and coaching support to businesses across Canada.
There’s more! Want to improve your communication with employees, partners, and customers? I help organizations improve communication through social media strategies and management-level workshops. Read my Communications & Management blog.
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