Selling a business is remarkably like selling a house. You can sell it as a “fixer-upper,” which is easy but won’t get you top dollar because the new owner is going to have to invest some money in bringing it up to its full potential. Or you can invest some time and money into strategic operational improvements, typically recommended by your broker, which will result in a higher price point in the market. And just like your home, if you’re thinking about selling someday, you might wish to make those “renovations” early and enjoy the results (smoother operations, higher profit margins) while you still own the business.
What do I mean by “operational improvements?” Changes that help the business run smoothly with less oversight from the owner – while still maintaining the owner’s control over the operation. (The same holds true for any key employee in the business; you don’t want your business to be dependent on any one person for its success.) The more that your business becomes a “turnkey” operation, the easier it is to transition the business to a new owner with no loss of productivity. Not only that, if the business can operate effectively without constant oversight from the owner, that frees up the owner to focus on leadership: innovation, strategic direction and decisions, developing your team, identifying new opportunities. And last but not least, these improvements allow the owner to truly “unplug” on vacation, rather than constantly checking in to make sure nothing has gone off the rails.
I mentioned higher profit margins above as well. If your team has clear roles and responsibilities; clear processes; and the right tools and information to do their jobs well, then their productivity will increase. Producing more with the same set of resources (people in particular) results in a higher profit margin. If your business can serve more customers with the same staff, without any loss of customer service, that’s a recipe for higher profit.
Sometimes owners who have no immediate exit plans think there is no hurry – it’s okay if their business is highly dependent on them because they have no intention of stepping away from the business anytime soon. That would be fine if their exit were 100% under their control. Unfortunately, people end up selling or leaving their businesses due to all kinds of unforeseen events.
The owner of a pet food store down the street from me had a heart attack in his 40’s – I’m sure unexpectedly – and his death left his widow with a business that she and the staff had no idea how to run without him. Rather than being an ongoing revenue-generating asset for her, the business closed within a couple of months, and I’m sure those months were confusing and painful for both her and the store’s staff. And a client of mine came to me when their director died unexpectedly in a car accident, leaving the mostly inexperienced staff with no idea how to carry on in her absence. Other scenarios that colleagues of mine have seen include divorce, sudden disability, and urgent family issues.
In these situations, a business that can carry on effectively (at least short-term) without the owner is a real asset – while the immediate crisis is being handled, the business continues to operate and generate revenue and profit, and the staff are less likely to start looking for other jobs if they know the business is functional without the constant oversight of the absent owner. So even if the owner has no plans to exit, they should consider what would happen in the case of an unplanned absence (temporary or permanent), and structure the operations to be mostly independent of any one person, whether that’s the owner or a key employee.
So, I often advise business owners who are thinking of exiting in the next 5-10 years to think about reviewing their operations and putting some practical improvements in place. And I also advise owners who have no plans to exit anytime soon to consider making some of these improvements now, to benefit their business in the short term with smoother operations and higher profit margins, and also in the future when they inevitably exit, whether their exit is planned or unexpected.
Next month, we’ll take a look at some specific ideas for improving your operations.
