As another financial year comes to a close here in Australia and we see a return of confidence in the economy, will this be the year we see baby boomer business owners again look at cashing in on the one major asset they have?
If so, have they done enough work ON their business to get not only a reasonable return on their investment but also enough to live a comfortable life in retirement?
What does this mean exactly? What work should they have done on their business and how much is enough?
Well, prospective buyers of a business will first of all look at the expected R.O.I. i.e. their return on the investment they make. This needs to be substantially more than the interest they can get from the bank. But even that will rarely be enough as the last thing they want is to buy a job, as they end up being chained to it which then limits their potential to purchase other business opportunities. So, to make the business appealing to the buyer we need the following:
Management – They will expect an empowered management team who understand the company vision, the objectives, the strategies to get there. They should have a clear road map of the journey the business is on, where the pit-stops are, the resources required and the expected timeline.
Systems – Clear policies, procedures, scripts etc. are critical to a well run profitable business but you need to go further to maximize the value add to a prospective buyer; ensure that all customer databases are accurate & up to date, same goes for suppliers, sub-contractors and employees. Ideally, these databases should also include the value of each account and demonstrate that the risk is minimized by having the revenue spread over several accounts. Review supplier agreements and where possible lock-in new fixed price annual agreements prior to selling. Create SOP’s i.e. Standard Operating Procedures for each step of each task complete with photos or better still video instruction!
Financials – Again, critical that this area of your business is fully up to date; there are many accounting packages available on the cloud these days which allow you to have live data at your fingertips. At a minimum, the P&L and Balance Sheet should be reconciled monthly within 5 working days of EOM. In my time as a business broker I could not believe how many business owners expected buyers to make a reasonable offer when presented with financials two years out of date and in the worse cases not even showing a profit! So, if you really plan to exit in the next couple of years, get those financials up to date and concentrate on profitability rather than tax minimization.
Product/Services – What does the business have to sell? Where does each product or service sit in it’s respective life cycle? Does the business have plans for it’s replacement? Can it be improved? Is it a candidate for franchising?
Image of the four major product life cycle stages (Photo credit: Wikipedia)
People – Last but not least, the people in the organization; are they engaged? Do they feel that what they do is important to the result of the business? In other words is it a work culture that an investor would want to buy in to?
The trade off – Okay so as you can see there is a bit involved in working ON your business, the choice (or trade-off) facing the baby boomer business owners wanting to sell is this:
Are you willing to spend the next 8 quarters (2 years) turning your business into one that is investor ready? Because I am afraid that if you are not you best be prepared to have a fire-sale.
After all those years spent in your business I am sure that’s the last thing you want so starting now, one week out from the new financial year, make the commitment. Do it now, 2 years from now you will be glad you did.