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Planning to sell? Planning to keep? Either way, your business is an asset you shall reap

Planning to sell? Planning to keep? Either way, your business is an asset you shall reap

September 18, 2010

A major milestone is occurring right now that is going relatively unnoticed.

As you read this a record number of baby boomers now entering retirement age are trying to sell their businesses, but most will never do it. More alarming, if they do manage to sell their business, only 1% will get their asking price.

Even if you don’t plan to sell your business, pay attention because it could mean hundreds of thousands of dollars for you – if not millions. I’ll tell you why in a moment.

First, some background. Every year, about 250,000 businesses change hands. That figure is suppoesed to jump to 500,000 annually for the next 20 years as the "age wave" surges ahead and the seven million baby boomers who own businesses seek to retire, according to the Exit Planning Institute. But here are two very sobering statistics:

* 75% of businesses that go to market, never sell. They either fold or the business continues to putter along, says Harvey Zemmel, author of The Secret to Exceptional Wealth and founder of MaximizeYourExit.com.
* Of the 25% that do sell, however, only one out of every 100 of them get the best price, Zemmel says.

That’s no surprise to Bill Pate, senior advisor for Business GPS and a buy/sell specialist for business owners. “Unfortunately, most sellers don’t have a clear exit strategy and simply want to get out as soon as they can, which often means they get far less than they imagined,” he says.

The secret to getting the highest value? Begin to plan at least one to three years ahead, Pate says, so you can position your business for someone else to takeover. Too many times, he says, owners have no idea what their business is worth until they get an estimate from a CPA and then “they just leave it to fate.”

Zemmel takes it a step further and says you should actually begin with the end in mind from the day you open your business.

Just like you have a business plan for the next three, five or seven years, he suggests you should also have a target of what you would sell your business three years from now, five years from now and seven years from now.

Then, “reverse-engineer” your business and figure out how to generate the revenue and profits you’ll need to meet those target values, Zemmel says. Even if you have no intention of selling your business, you should be doing this anyway so you’re running your business with the most profitable and efficient model.

For example, if you have a restaurant and you determine it should be worth $1 million three years from now, it should have a net profit of about $250,000. Restaurants typically sell at a multiple of four times profits so if the business is earning $250,000, it would be worth $1 million. Based on that calculation, you must figure out how you would structure the business to generate the profits you need.

Two businesses with the same amount of sales, however, may not get the same multiple. One may get a multiple of four while another that has twice as much profit may get a multiple of eight and the owner could walk away with $2 million (twice the value of the other business). Profit margins, the management team, the systems you have in place, your customer base and market outlook all help determine the multiple.

Here are three tips to get the highest multiple

1. Don’t create the business around you. You need a manager or a team of people around you, Zemmel says. “So if someone gives you a check for $1 million or $5 million life goes on so while you’re in Barbados, the business goes on.”

2. Sole proprietors don’t lose heart. Put the knowledge that’s in your head, such as your marketing plans and business processes, and put them down on paper for a new owner to use, Zemmel says.

3. Focus on beating the top two or three key numbers everyone in your industry uses to judge their businesses performance. For instance, Zemmel ran 14 assisted living homes in the UK before he sold them at a multiple of 10. He ran the business by focusing it on two key metrics: occupancy rate and net profit. The average occupancy rate in the UK is 89.3% but thanks to his marketing he earned a 97% occupancy rate. He also beat the average industry net profit of 22-25% and earned more than a 32% net profit. As a result, Zemmel sold the business for millions more than other business owners in the industry.

The most important question you can ask ...


“What makes your business unique?” That’s the first question senior Business GPS advisor Bill Pate says he asks business owners who are interested in selling. The answer is often telling.

The reply he often gets is, “We don’t do anything that’s much different from everyone else.” But the things that make your business special are nuggets of gold that help you get the most value in the sale. In one case, he says, the seller of a telecom firm had no idea that his company was one of only a handful in the world that could produce parts within a very strict set of guidelines.

That realization re-energized the management team – and the owner, who decided not to sell after all. Instead of retiring, he’s now actively working to grow the business and just completed an acquisition of another company, Pate says.

Always taking you from where you are to where you want to go,

Jon

Jon Goldman, President & CEO
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