John Warrillow on How to Make Your Business Attractive to Potential Buyers
You love your small business, but you wouldn’t mind if somebody showed up and offered to purchase it. After all, it could be the ultimate payday — and help prove that you did what you set out to do, as in build a successful enterprise from the ground up.
However, just because your balance sheet shows evidence of success does not mean there will be a bidding war anytime soon. If you’re thinking about selling your company, consider these thoughts from John Warrillow, founder of the Sellability Score and author of the book Built to Sell.
1. Do not be the cornerstone. Entrepreneurs are doers. Why hire somebody else when you can handle tasks yourself? That strategy has merit at startups, but if you want to sell your business, your company needs to be able to run without you. If you’ve set up systems that run only when you are actively participating in them, prospective buyers won't be interested.
The potential buyer knows that, once you get the check, you’ll be unlikely to have the same level of passion for the business. Fix that by hiring and training employees to run the company as soon as it’s practical. As your business grows, turn your focus to strategies and processes rather than lower-level jobs like sales and distribution.
2. Observe the “15 percent rule.” Review your books and take the 15 percent test. If your largest customer is responsible for more than 15 percent of your annual revenue, you are probably not acquirable. Acquirers know that you’re likely to take some of the relationships you’ve built with you when you leave, and they cannot take the chance that one of those will be your biggest client.
Instead of trying to do a lot for one client, consider offering a small portfolio of products or services and market to many clients. As flattering as it is to have the trust of that one large customer, your business will be unattractive to buyers.
3. Standardize your processes. Some small-business owners struggle to get out of a startup mentality: They don’t have a formal employee handbook, job descriptions, and standardized processes for everything from purchasing to accounting.
Your company grew because of your high standards, and the future acquirer wants to know that the culture won’t leave with you. By having all of your processes written down, you not only help to preserve the culture, but also can show the acquirer that you already operate with the same level of formality as a larger business — something your company will become once it’s purchased.
4. Think like an acquirer. Finally, turn the tables and become the buyer. Go to sites like Bizbuysell.com and look through the businesses for sale. What stands out to you as attractive? What strikes you as a red flag? Are any of those red flags present in your business?
Just as you would give your home curb appeal in order to sell it, do the same with your business. You may not have plans to sell now, but it doesn’t hurt to make everything attractive for those who may be shopping around.
Tim Parker is a business writer for Intuit and is passionate about solving small business problems.