Running a Business So You Can Sell the Business
Unlock the Value in Your Small Business
Why Would Someone Pay Money to Buy a Small Business?
It is common for a small business owner to assume that when they are tired of their business they will just one day shut it down and move on. They haven't even considered the possibility that someone would pay money to take over even a very small business.
I have managed the sale of over 500 small and mid-sized business. My experience tells me this: If your business is open and operating and has customers there's a 90% chance that it is worth selling even if it's not particularly profitable.
Here are 4 reasons why someone might pay a business owner so that they can take over the business rather than start a business from scratch?
- The small business has customers that the new owner doesn't need to go create
- The small business has a name that is recognized, at the very least, by current and past customers
- The business likely has a functioning website and a telephone number that some customers use
- The business has some system (often crude or archaic but a system none the less) that generates the product or service and the buyer of the business won't have to recreate that system from scratch.
Good Small Business Accounting Systems
How to Run Your Small Business So that Someday You Can Sell It
The value of a small business is not always tied directly to the profits of the business but often the profits are a good indicator. Profits mean that the customer is willing to pay you more for your product or service than it costs you to produce that product or service. The difference between the cost to produce the product or service and the price you can sell that product or service for is the Value you add to the process.
Your ability to sell that value which you have added is determined by your ability to prove that the value exists. Are there system in place for producing the product or service? Can your profits be determined by your business financial records? Is your bookkeeping in good order so that a buyer can determine if the profits you think you generate are actual, real profits?
Read this one again. The majority of small businesses I look at don't keep their financial records in a manner that would allow a buyer to figure out if the business makes a profit. How does this happen?
- Most of the time it's because the small business owner has commingled the business expenses with their personal expenses. Here's an example, you use your personal vehicle for occasional business purposes. You visit a customer occasionally, you go see your accountant once in a while, etc. But, instead of charging your business the 52cents a mile the IRS allows for business reimbursement and knowing exactly what the amount of business use is....... when you need a tank of gas (all the family cars) the biz pays, when you need an oil change the biz pays, when you need new tires the biz pays. Another example, you run the biz but the biz is somehow paying for cell phoness for the spouse and the two kids, out to dinner with the family? Presto, out comes the company credit card.etc. When the business owner does these things there is usually no way to allocate the expenses appropriately between the business and the personal expenses. Therefore the business appears less profitable because it is funding personal expenses, not the expenses of operating the business. This means less provable business profits and less money a business buyer will pay you for your business.
- Another thing that we often see has to do with the revenue (or sales) of the business. Let's say you run a small computer fix-it business. A customer calls because he's having printer trouble. You meet him, determine it's a bad cable, you fix the cable, your 30 minute charge is $45. The customer peels off 2 - $20 bills and a $5. You stick the $45 in your pocket and no record of the sale exists. You may feel clever because you just got away with cheating on your taxes but you also just diminished the value of your business because if the IRS doesn't know you got paid then a buyer for your business won't believe it either.
- Another business value killer? All of the important information about the business is filed in the business owner's brain and no where else. This may seem harsh but here is an example of something that happens in real life and we've seen it hundred's of times. You're running your small business and your spouse is not involved in it. Let's say that tomorrow you get run over by a truck. What will your spouse do with the business? Can they go into your office and find what they need to operate the business? Are there any written procedures? Customer information? How to price products or services? Who the suppliers are? Who owes you money? Who do you owe money to?
A good resource for advice and information about running a small business is your local Small Business Development Center. These centers are often found at your local college or university and offer a wide range of services for small business owners and those who wish to someday own a business.
Managing a Small Business
The Value of Your Business in The Eyes of a Person who might Buy Your Business
If you run your business like you were preparing it for sale........ your business will be more valuable to a buyer and more valuable to you.
Too many small business owners operate the business focused, almost exclusively, on avoiding taxes. I'm all for minimizing taxes but that doesn't mean you have to do so by destroying the value of your business. Everybody hears about wealthy people who minimize their taxes...you can do this also and legally AND preserve or even enhance the value of your business.
Every business owner should operate their business like it is for sale because in reality...it is..or it could be....as soon as.... tomorrow.