Is your business a saleable asset?

August 7, 2008, 11:58 am Dr Greg Chapman KBB

It is good practice that you have an exit strategy when you plan your business at start-up stage.

We are told often enough as small business owners, that we must have an ‘exit strategy’. But to have an exit strategy, you must have a business that is a saleable asset. What does that look like?

These are the key features that a business should have in order for someone to want to buy it. (And conversely, if you are buying a business, this is what you should look for.)

Firstly, does it make a profit? This might seem to be an obvious question, but just because it has a positive cashflow, does not mean that it is making money. Does it give an acceptable return on your investment in time, money and effort, after your wages? If not, don’t expect to receive payment for that from a buyer.

Secondly, would it still make money if you were not there? If the answer is no, what you own is not a business, it is a job with overheads. Unless you can demonstrate to someone else that you can be making money when you are not there, you will be asking a buyer to buy your job. How successful do you think you will be? You need a business model that will enable you to produce an income that does not rely solely on your own efforts.

Thirdly, can you give a buyer an Operations Manual that if they follow, that they could expect to achieve the results you achieve, albeit with some training? This is what franchisors are selling. An operations system that dramatically reduces the risks for the franchisee when they follow it.

Fourthly, where are the customers going to come from? You might have a good number of customers today, but what guarantee is there that they will stay when you go? And, even if they do stay, they won’t stay forever. How will they be replaced, and how would the new owner grow the business? If you can’t answer these questions, this will have a very significant impact on the price you will receive. If you can show a marketing plan that the new owner can follow, show examples of past campaigns and their results, and the customer service strategies you use to keep people coming back, the new owner is likely to pay a premium for the potential for this business.

And lastly, how is the business controlled? Could you appoint a manager, and go away, and be sure that the business will continue to be a success in your absence? If you can do this, your business can be replicated, and this will increase its value by many times. This is achieved through a reporting system that lets you know what is happening in all the key areas of your business, even if you are not there.

Successful franchises have each of these elements in place and can charge 3-4 times the annual profit (after the owners’ wages). More sophisticated companies (I am referring to listed companies) regularly charge 15 times earnings and more. But businesses without these elements are often lucky just to get back stock and physical asset value- often highly depreciated, that is a fire sale valuation, with no value from the business at all. But, when you put all these elements in place, you will have a Saleable Asset which will reward you for your invested time, effort and money.