Ok you need a job so you go and buy a business or start a business, I get that, but then what? So many people buy a business purely as a source of income to replace a job they have had or for some more substantial reasons, such as to gain a sense of purpose or feeling it’s something they need to do. That is all well and good but my question to you is – what is your end game?
What is the outcome that you’re trying to achieve in your business and then ultimately in your life? What’s your exit strategy, do you have an exit strategy? The big thing that I think a lot of people are missing is the “and then what?” So you go buy a business and then what?
At some point it is inevitable that you will want to exit from the business, therefore it’s a good ideas before you get into the business – right at the beginning of the process – to work out how you will get out of it. Chances are it will likely be very crucial when the time comes that you say “I don’t want to do this anymore”. By that that stage you’ve had enough and have normally lost the enthusiasm you once had. From this standpoint, it becomes really difficult to pivot and adjust the business to make it saleable to someone else if you haven’t already considered your exit strategy.
It is of absolute importance to consider how long you intend to stay in the business for. Be it 5 years, 10 years, 20 years or more. You might be looking to stay in the business until your dying days so that you can pass it on to a family member and leave a legacy. Some choose to pass on their shares to a Not for Profit organizations providing ongoing sustenance for a good cause. Maybe your vision is to start a family business but it didn’t pan out according to your expectations then you need to recruit someone for the business that will eventually take over and earn or buy down your shareholding in the process. While there are many options for you to completely cut ties with your business, many also opt to become a minor shareholder and continue to receive dividends into the future. And this is exactly the point, there are so many options but you need to decide which one suits your future plans best from the get go.
When selling a business, the ideal scenario is that you’ve built a business that is an attractive buy for the next investor. This is when you can hope to achieve a fair and reasonable multiple of the profit for the business.
When I talk about a “multiple”, I’m talking about the “goodwill” aspect of the sale which will be a multiple of the annual net profit. So, in a business sale you have the asset side of the value and you have the goodwill component. To a large degree the asset values are whatever is an agreed market value is. However, the goodwill aspect of the sale price has a number of moving parts, not least of which is the company profitability.
So, if your business is making a net profit after overhead expenses, you will want to get a multiple for when someone comes in and buys that business. Maybe it’s 3x, 4x, 5x depending on the size and shape of the business, the barriers to entry, and whether the buyer negotiates a restraint of trade/non-compete clause in the agreement. These variables and more need to equal a multiple that both parties agree on.
Now if you’ve got a business that’s not going so well or is poorly structured, it’s unlikely that you will be negotiating from a position of strength. For example, if you aren’t producing any profit it’s tough to negotiate any goodwill. Really if that’s the case you are just going to be selling the assets and that’s unlikely to be the goal of many people that start a business.
It’s really important to think about when you will exit , who will likely buy/takeover, and how will you sell your business. Having answered these questions at the beginning will enable you to understand what will make it saleable and will guide how you shape your business during your tenure of ownership. Don’t find yourself 5 or more years into your business saying “I’ve had enough of this I want to sell” and only then start to think about how to sell because by that time, it’s too late. Either you won’t have the skillset to make the necessary changes to the business or, you will have simply lost the passion, enthusiasm and energy to enable you to drive these changes. When buying a business – plan the beginning, middle and end. Don’t lose sight of the reason you started by failing to fully plan for your future.