How to sell any small business for the best price possible
Most small business owners have the bulk of their wealth tied into a single asset which is their business.
It may have taken you 4 years or 40 years to get to this point, but you want to exit your business and realise the most value from the blood, sweat and tears that you invested.
You may want to exit your business to retire or to start something new. Regardless of your reasoning, you want to sell your business for the best price possible
The problem though is that most small businesses are not businesses at all.
They are, in fact, an extension of the owner. They are so intricately connected that there is no way to tell where the business begins and where the owner ends.
If you got sick or were unable to work for any other reason, then most of the value that you have built up is gone. You won’t be able to sell the largest asset you have created.
It’s incredibly risky to have all your wealth and livelihood tied into a single asset.
The best time to think about how to sell your business is when you start your business, and the second-best time is now.
Any business can be sold
There are broadly three types of small businesses:
The first is where you are selling your hours as a consultant.
If you worked in a company, you would be called a specialist or an expert. Like with any other senior employee, you might have an assistant. However, you would not have more than one or two staff to help you perform your job.
The only real difference between this hourly consulting and working for a company is that you may have to negotiate your salary and find a new boss every couple of weeks or months.
Though you would probably earn much more as a consultant than working for a company.
The second is based on a service you provide.
An accountant running an accountancy firm, a baker running a bakery, a mechanic running a car garage or a hairdresser running a salon.
You may be the only one working in your business, or you may have a dozen employees who perform the same task as you. Even if you are the only accountant or hairdresser, you are still selling a service instead of yourself.
Clients might prefer if you cut their hair or did their books, but you are providing a service which could be replaced by another individual if you were sick or couldn’t do the job for whatever reason.
The third is where you have a product that you are selling, but you are still the central figure in the business.
This could be something like a tyre fitment centre or a hardware store.
You have a strong relationship with your customers, and everything runs through you, but if you were not there one day, then the business would be ok. A new customer might not even realise that you are the owner or not around.
Each of these businesses are different and don’t cover every possibility, but most business owners fit somewhere between these broad categories.
The problem with all of these businesses, is that the owner is still a large part of the business. Until you separate yourself from the business, there is no way to sell it because you are a part of it.
There is an incorrect belief that you can’t sell the first two types of businesses.
Though in reality, there are consultancy firms like Mckinsey and Bain as well as Accountancy firms like PwC and Deloitte.
With all these businesses, if you remove individuals, including the CEO and partners, the business will go on perfectly fine.
The reason is that they run on systems and as we’ll see, any type of business can be run on systems.
We are replaceable
To begin to get our business ready for sale, we first need to get over the fact that we are irreplaceable.
We have to get over the fact that we are so smart or unique that someone else can’t learn to do what we do.
We might be scared that we are going to lose our secret recipe or our customers if any of our staff decided to start their own business. If they are planning on doing this, then they will anyway, whether you are there or not.
Companies like KFC and Coca Cola even developed a system to keep their formula a secret.
Your business value is determined by how much money your customers give to it every year, not by the assets or secret formulas.
The easiest way to imagine how your business would run without you is by thinking about how you would franchise your business.
What are the rules systems and culture that you would design to replicate your business down the road, with everything except you?
It may be disconcerting for some of your customers to have their hair cut by someone else when they visit your salon, but they’ll soon figure out that the next best thing to having you is having someone trained by you.
The three keys to implement so that you can sell your business are:
Rules set the boundaries of what is allowed. They are essential so that people know what they can and can’t do. Rules are things that everyone needs to follow.
Rules are things such as:
The dress code or uniform
Cleanliness standards for food preparation
What time do you open and what time should everyone arrive?
Think about what you would tell a new employee if they joined. Think about when you last had to reprimand a staff member. What rule did he break?
Write it down so that you have a comprehensive list of all the rules that can be handed over to a new employee or even a new owner.
Culture tells someone how to behave when there is no rule in place.
If a customer drops their coffee just as they walk away from the counter, are you going to replace it for free?
If you are running an accountancy firm and your client forgot to include a document that caused him to get a tax penalty, what are you going to do about it?
Are you focused on quality over price, or are you the budget or discount store?
McDonald’s is famed for its speed and low-priced fast food. If there is a request for a new menu item, no matter how good it is, if it is expensive and slows down the drive-thru, they won’t include it.
There doesn’t have to be a rule to say that if it costs more than 5 bucks takes more than 5 minutes. Low cost and efficiency are part of the culture.
The culture can’t override the rules, though. Hygiene rules, for example, still need to be kept in place regardless of whether it would save money not to use hairnets or clean the surfaces as often.
The culture is what keeps the image or the style of the business you created. Culture is not a wish list of things you copy of other companies; it’s the core of your business.
Systems are all the processes that go into making the bread. What ingredients do you use? How often do you buy them? What time does it go into the oven and what time does it come out?
What time does the cashier deposit the money in the till? When do you buy new ingredients? When do you throw the old ones out? How long does the bread stay on your shelf?
If you are a mechanic, then what is the ten-point inspection you give every car that comes into your garage?
When your staff are making sales calls, what’s the script?
All of these are systems.
Humans are built on habits and businesses are built on systems.
Systems aren’t just computer programs even though technology has made them a big part of it.
Document everything that everyone does in the business. That way if anyone leaves, including yourself, you can replace them with that document.
Thinking about the franchise model again, what would you write in the training manual for everyone from the baker to the cashier and cleaner?
Documenting processes may open your eyes to inefficiencies in your business that you never realised before.
Throughout the process, you will begin to understand your business better and perhaps make changes that you didn’t even know needed to happen.
Implementing systems doesn’t mean that you must leave the business tomorrow. It just allows you or your family, if you are not around, to sell the business for the greatest value it can.
And when you are done creating all these rules, culture and systems, you can take a holiday, sell your business or at least have peace of mind that your life’s work will be worth something.