How do you establish which type of business you have? (There are only two types that really matter).
Many business owners have realised there are only two types of business – at about the time they decided to exit their business.
That’s a bit late to realise this important point and it prompts me to share the two types of business with you. I’m not including corporate businesses in this – just private companies limited by shares or guarantee.
Generally, you can develop your business in one of two directions, either to sell, or to keep.
The first option is to sell the business.
If you want to sell in the future, you will probably sell the entire business as a going concern including the premises, staff, stock and customers or, perhaps you will sell just the ‘list’: your list of customers.
Given sufficient time, almost any business can be prepared for a successful sale. However, I find it can take between three and twelve months, depending on how the company is running.
The second option is to keep the business.
This option assumes you have no strong desire to sell your business, but to keep it going for as long as you need it or perhaps, to pass it on to family.
I’ve noticed that for most, the decision to keep a business tends to be based on lifestyle rather than financial factors.
Your objective will be to generate the maximum value from the business – but that value can be taken (earned) in two quite different ways, so regardless of your choice to ‘sell’ or ‘keep’, there will need to be a specific strategy to follow.
Let’s look at the two strategies in more detail.
1. If you want to sell your business in the future
You know that you don’t want to be running your business for ever and it’s a means to an end.
You have a sense that selling your business one day, could mean financial security, retirement or perhaps to provide the means (time and money) to set up your next business venture.
Whatever your reason, you will probably have a rough idea of by when you will want to have sold the business.
Selling will hopefully result in a pot of cash, for your tenacity, cleverness and hard work over the years. But for your business to be extra-attractive to a potential buyer and maximise its sale value, your strategy will need to focus on two key areas of the business.
Assuming the entire business is to be sold, then having an effective and performing management team in place could be important. The day to day operation should be able to operate without you.
Your plan should assume that any new owners will want to keep the management team, so your strategy will be to ensure there is a competent and effective management team in place, well before you want to sell. However, you may end up simply selling the less valuable trade which, is basically your customers but not the physical building, the operation or staff.
Now let’s consider finance. A key reason someone will consider buying your business, is they think they can generate more value from it if they owned it. So you will need to demonstrate this is a business that can already generate value.
The Balance Sheet will be important because it can help demonstrate the business’s ability to create value. This is why your strategy should include using a proportion of retained profits to build up the balance sheet over time.
For many business owners, this means making a conscious decision to balance earnings, say from dividends, with building up the balance sheet. The expectation being that the value of those dividends not taken out of the business, will be greater when the business is sold in the future.
2. If you want to keep your business
Your plan, if indeed you have one, will be to run the business for as long as you need it or perhaps to pass it to family in the future.
You will aim to grow and develop your business in the normal way but you won’t worry too much about how the balance sheet looks and will most likely take more of the available profits as dividends, while maintaining sufficient value on the balance sheet to look good enough for suppliers to feel confident to extend favourable trading terms.
When I get to know a business and its finances, I can generally see those with a plan to ‘sell’ or ‘keep’. For example, those in the ‘sell’ group will have a plan in place to develop their management team including succession, plus they’ll have strategies to maintain a strong balance sheet.
I find those business owners in the ‘keep’ group will generally earn more from their business, want to be the boss for ever and have no clear plans for succession. The balance sheet will be just about be good enough for suppliers to extend credit terms.
A third way
However, there is an important third category that needs a mention.
At first glance, businesses in this category sit in the ‘keep’ group. But when I look closer, I can see they aren’t a good fit for the ‘keep’ or ‘sell’ groups, because they have no tangible plan. They are in a no-man’s-land, neither in the ‘sell’ or ‘keep’ groups. It’s an odd place to be!
Here’s the issue.
A business without a plan to either ‘keep’ or ‘sell’ will quite naturally gravitate into a no-mans-land.
Without a clear plan in either direction, you don’t know where the business is heading and it won’t be running anything like as efficiently or effectively as it could.
In this situation, I recommend you decide on one direction or the other. It doesn’t much matter to the business which, but be clear about having one clear direction for the business.
Allocate quality time to think through and establish what you’d like to do with your business in future and then put the strategies and working practices in place that will help it become more efficient and effective – and more profitable.
Can I help?
If you would like to sell your business within in a year or two – and you don’t want to hand your business over to a sales agent for an outrageous fee, then you will need to allocate some time to producing and working-on your plan.
If you need some help you can ask me to produce the plan for your business, with all the important tasks and activities laid out and scheduled – a step by step guide for the year or two ahead.
If that sound like a good plan, then let’s discuss the possibilities. You can call me directly on 07850 900004, or email me at firstname.lastname@example.org
© Paul Munnery Consulting 2017