With the constant stream of successful start-up acquisitions hitting the headlines, many entrepreneurs are now starting their businesses with a three-to-five year exit in mind.
Unfortunately many new entrepreneurs feel that a unique idea is enough to achieve the acquisition. Although this always helps, the businesses that sell for the most return almost always combine a dedication to planning, strategy and hard work.
Jonathan Russell of Intelligent Business Transfer, specialist business transfer agents, says, ‘Often we see the businesses that scale and ultimately maximise their value on the market are the product of an owner’s almost obsessive focus on building the value of their business.
‘This leads to improvements across the whole business, with no area neglected, leading to a much more attractive proposition to potential buyers.’
The four steps to creating a saleable business
Building a business to sell takes a great deal of discipline, especially when it comes to creating a business that can thrive without you. We have covered the three most important areas you must focus to build a successful, scalable business that will achieve maximum value in an acquisition.
Profitability
Showing a consistent track record of profitability is essential to attract potential buyers. Consistent profitability is a clear indication to a potential buyer that your business is less susceptible to external forces and potential owner errors, in addition it will also show the untapped earning potential.
‘Having a steady flow of cash is critical when you have a small business,’ entrepreneur Firas Kittaneh told Entreprenuer.com. ‘You need to pay the bills and your employees, as well as purchase materials to scale your services or build your products and more. You also need to make a list of one-time expenses and ongoing expenses and figure out how much money you’ll need to operate on a day-to-day basis.’
Strong Management
As Sir Martin Sorrell’s departure from WPP – the advertising giant he built – showed, succession planning is crucial to the survival of any business. Sir Martin’s sudden exit from WPP led immediately to suggestions it would be broken up, given that the business had no obvious successor and was thought likely to struggle to find one.
So what potential buyers will be looking for is a business that is more than just an extension of its owner. Helen James, corporate finance partner at H W Fisher & Company says, ‘If everything to do with a business – especially its strategy, client relationships and future plans – is in the owner’s head, rather than shared among the senior management, it will be harder to attract a buyer. So you need to be able to demonstrate that the business can continue without you.’
Recordkeeping
From day one it is essential that you keep record of all your business transactions, statements and inventories. The higher the potential selling price your business achieves, the more meticulously your records will be analysed by would be buyers. This is the area where most business owner’s fall down, as they strive to grow the business and make it viable records are often neglected.
Keeping good record will ensure that you maximise your sales potential and earn the trust of the potential buyer. Business guru Jay Goltz of Jaygoltz.com says, ‘You cannot be in control of a business if you don’t know what is going on. With bad numbers, or no numbers, a company is flying blind, and it happens all of the time.’
Building a Brand
Branding is one of the areas of your business that you should plan before launch and should be an integral part of your marketing strategy. Developing a recognisable brand can become a significant asset in your quest to achieve the maximum return when you come to sell your business. A great brand will lead to customer loyalty, advocacy and can be a safe guard against to protect your business against aggressive competitor activity.
This piece was updated on April 25th 2018 by Helen James, corporate finance partner at H W Fisher & Company
