Posted: 3:55 p.m. Thursday, July 25, 2013
By Margaret Heffernan
You may never want to exit your company, but making it fit to sell will guarantee it's healthy. Here's how.
Whenever I talk to entrepreneurs or students about exit strategies, they almost invariably protest: But I don't want to sell my company! It's my baby. Why would I walk away?
I have two answers. The first is that maybe you never will sell; perhaps your children will love the business as much as you do and you'll be able to hand it on to them. The second answer is that one day--as hard as it may be to imagine now--you will need or want to stop working and you'll want to capture the value of all your hard work.
But the more important point is this: Even if you never sell your business, making it fit-for-sale is a tremendously worthwhile discipline. It ensures you are building an asset that other people can understand and respect. Being fit for sale means you run a tight ship that won't run aground easily. So even if you intend to hand on your company to the fifth generation--making it sellable is a great way to run it now.
Many experts argue that it takes 10 years to prepare a business for sale. I think that's an over-estimate, but it isn't far off because normally there's a lot of work to do to answer four crucial prepped-for-sale questions.
Can the business lose you?
If the company depends entirely on you--your creativity, ingenuity, inspiration, salesmanship or charisma--nobody will want to buy it. The risk and the dependency are too great. To the degree that a company does not depend on its leader, it is more valuable for a buyer, and more sustainable.
Do you have reliable revenue?
Most businesses are valued using annual revenue, but the buyout price multiple is largely determined by the stability of that income. Subscriptions, renewals, a roster of clients tied to your products or services represent recurring revenue that is more valuable than cash. What can you do to demonstrate your revenue won't vanish overnight?
Do you groom your own talent?
Organic growth--in talent and in products--demonstrates that your firm is truly sustainable. Of the two, I think homegrown development of talent says most about a company's culture leadership. If everyone's been brought in from the outside, why? It's an expensive and risky way to hire and suggests that staffing is the biggest variable, when it ought to be the biggest asset.
Do you have real assets?
Companies are bought for their revenue, customer base, technology, or people. A few great companies offer all of these, but any valuable business offers one. Nobody buys out of sentiment; according to John Warrillow, who's expert in this field and sold his own businesses very successfully, most buyers acquire in order to growth their own businesses. So what exactly do you bring to that table?
All of these questions represent forms of discipline that ensure a company's health and longevity. They also persuade everyone in the business that there's a reason to stay: palpable signs of growth and progress. Making a company fit to sell may be the only way to ensure you never need a buyer.