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The Enterprise Cycle – Small Business Succession Part 3

succession strategies for business scaling and exits

 The story so far...

Part 1: imagining the enterprise. The business owner decides she doesn't want to work 7 days a week for the rest of her life.

Part 2: how you get there. The business owner discovers the tools she needs to build an independent enterprise and claims her life back.

Part 3: Act III - how will it end? The owner picks one of the three different shapes the Enterprise Cycle can take.

Three Possible ‘Endings’ in Act III

Passive Income: Making Money While You Sleep!

In a nutshell: grow the profits of your business to the point where you can afford delegate the day-to-day management to someone else.

There are many forms of passive income. Each time you add an employee or process to generate revenues when you aren’t there, is a form of passive income. Online sales can create passive income. Other forms of scaling like expansion, licensing, and franchising can create passive incomes.

The most common path is to grow to the point where there is enough profit to pay for fully independent management. At this point the owner can step out of the day-to-day picture. Designing this process involves planning the size and structure of an enterprise that generates adequate profit to support you, without you showing up to work.

Many doors: Scaling Up

In a nutshell: try this definition of scaling in the small business world from Les Mckeown at Inc Magazine:

Scaling-- the ability to grow rapidly and at a compound rate, compared to the arithmetical, two-plus-two-equals-four rate of growth that non-scaling businesses achieve-- requires new skills from the business' owners and managers.

Scaling a business is not just growing sales, it is growing your business.

Scaling takes many forms: expanding into new markets, rapid growth through acquisitions, or expansion through franchising or licensing.

The resources required to scale a business are greater than those required to grow sales. Healthy revenue growth is a precondition for scaling, but it is not enough.

In most cases we have to reach outside the organization for both human and financial capital. This means working with advisors and mentors, and with external support teams in areas like marketing and finance. Complexity becomes a serious issue when scaling a business and one pair of eyes is not enough to see everything that must be seen. It also means doing the groundwork to bring in outside capital whether through debt or equity.

To get a business to this point also requires sound internal operations with proven cost controls, great people, and efficient and documented systems.

Exits: Hasta La Vista
The third version of Act III is an outright sale of your business. This is how most owners understand business succession.

In a nutshell: develop an incorporated business valuable enough that someone else will want to invest in it or buy it outright.

These articles are written for small business owners considering business succession. With that in mind here are the nuts and bolts to consider if the sale of your enterprise is the 'ending' you choose.

  • There are at base two possible ways to sell your business: an asset sale (in which you sell the physical assets of your business) or a share sale. Share sales (selling some or all of the shares in an incorporated business) sales are tougher to complete favourably because it is a harder to prove the value of a business as an enterprise than it is the value of a truck or a factory (assets).
  • Done right a share sale generally favours the interests of the seller. Asset sales generally favour the buyer.
  • Selling your business requires many of the preconditions required for passive income and scaling: solid revenue growth, profitability, a good management team, good market share, and efficient, documented systems.
  • If you are planning a share sale, your market share, brand presence, team, and systems must be so strong that the buyer sees more value in the enterprise as a going concern than in its simple assets.
  • Your debt must be fully managed and in healthy proportion to your equity and earnings.
  • Consider the value of real assets like buildings carefully. If you own the building(s) that house your business that can be a positive or negative in a sale. In one approach, often successful, you retain ownership of the building(s) and lease them back to the new owner of the business.

Want to learn more? Download our free blueprint for growth: It Works Like This - The Story of Your Business!

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The Enterprise Cycle – Small Business Succession Part 2 Growing A Business - Not For Love or Money

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