Eventually, every entrepreneur realizes they cannot work in their business forever. For most entrepreneurs, this is the time they begin thinking of exit. Here are ten things you should think about before that faithful day.
The first thing I will like to mention is standardizing services or products. In the onset of a business, an entrepreneur figures things out as he/she develops. As time elapses, the entrepreneur figures out what works and settles into a way of doing business. This usually happens at the $100,000 mark. The problem with this is the knowledge is embedded in the head of the owner. The owner often fails to communicate this knowledge to new hires. There is kind of an “unspoken standard” or “way of doing things”. People learn “the unspoken way” haphazardly. By not standardizing, the owner’s loses 50% of the value of the business when it is time to sell. Nobody wants to buy a business when all the knowledge is in the owners’ head and if they do there are usually lots of contingencies tied to the deal.
Most entrepreneurs have this false belief that they are the best: No one can do anything as well as they do and without them the business will fail. This false belief enslaves them into believing they have to work harder than anyone to achieve success. They have a hard time even getting away from their work for one hour. The biggest problem with this, is you limit your business growth. They are people smarter than you and people who can do the job better than you if you just let them. If you have standardized your systems, delegation becomes easier: All the new person has to do is follow the systems you have created.
Knowledge management is not an issue that can be ignored in the information age. How we share information with staff, customers and vendors should be very well defined and preserved for consistency. Whether you use an intranet for communication with your staff and external stake holders or simply a cloud database, is irrelevant. What is relevant is that the method you use is efficient in capturing and transferring relevant information.
Innovation is the development of a new idea or developing a more effective design or process. Innovation could be in the form of redesigning your workforce, upgrading your technology, restructuring your offerings to match customers taste, etc.
Every product has a life circle. A product goes from growth, to mature phase and finally hits a decline. Innovation is required to stay competitive, if not your product life cycle becomes your business life cycle. Keeping tap of the external environment lets the entrepreneur see what processes, products or services need to be developed. As an entrepreneur, you should be a member of a trade association in your industry, read their magazines, and keep track of new developments. Keeping track of industry trends is important to your future existence. The external environment is consistently changing and the only way to build a sustainable business is to innovate.
The financial plan of most business owners goes as far as purchasing QuickBooks and once a year completing their tax return. If they are more prudent they might look at the financial reports developed in QuickBooks monthly. While this is better than nothing, business owners can do a lot more in improving their financial position by investing in better financial systems. For instance what controls do you have in place to ensure the information in QuickBooks is accurate? Just like anything else, if you put garbage in, you get garbage out. Moreover what about the structure of your financial accounts, are they capturing the information you need. When you look at your financial reports, do you have answers to the most critical factors affecting your business? All of these questions are addressed in the way your financial system is designed. Investing in having a professional design the system is worth the headache you will save down the road. Moreover, be careful not to commingle funds and keep your financial records as clean as possible. Good financial records are worth a lot when selling your business.
Planning and Budgeting
Planning and budgeting is the process of telling your business where you want it to go rather than it telling you where to go. Small business owner fall into the trap of thinking that they cannot control what direction their business will take so they do not plan. Planning and budgeting go hand in hand. A budget is simply the numbers behind the plan. Having a plan and delegating the responsibilities of certain aspects of the plan is crucial. With a plan and a budget you can plan and execute on your business goal. Also business buyers like to see a history of business planning and budgeting. This increases the amount they are willing to pay as they are less anxious about being handed down a sham.
Developing key metrics
Once you have a plan and budget in place, you need a way to determine if you are on track. Metrics are used to measure how things are going. Usually metrics are measured against a budget developed using a strategic plan. Monitoring metrics on a regular basis can point you to where your business is failing before it actually happens. Some metrics you may want to track are: productivity rate, net margins, customer retention rate, customer acquisition rate, etc.
Taxes have a big impact on what percentage of your net profits you keep. Tax Planning should be done before you sell. By structuring transactions differently you might be able to save more money on taxes. Do not wait until after selling to decide what you will do for taxes: When you get your cash after sale, you will be rest assured you have taken the best possible steps to minimize your taxes.
Most business owners do not plan for the day they will leave their business. They work until the day they determine they are burnt out. The problem with this is the business owner does not leave the business with the best value possible. Working with a consultant should be done couple of years before you plan to sell. If you wait too long your business may become unsellable. The top two factors that affect business value are:
- what is going on in the economy and,
- how it particularly affects the industry you compete in.
If you hit a time of decline, no one will want to buy your business. Selling in a timely manner, will help you take your time to identify the best buyer who might be able to take your business to a level you were not capable of doing on your own.
Another mistake I see is because business sales rule of thumb are usually based on a multiple of industry revenue, entrepreneurs think they will hold on to the business till they reach a revenue mark and then sell. This is a false thought because you never know what bad fortune may befall your business before you sell. Moreover, if you try to manipulate sales to increase revenue, a smart buyer will discover this during the due diligence process which will kill the sale.