In the last few days I read an article on Entrepreneur.com and the book Rework where people have said buying or starting a business with the idea of selling it is horrible. They gave various reasons why this disgraceful practice will hurt your business including it leads to a lot of bad things, you won’t focus on customers, and you will be too distracted by cashing out to do a good job.
Respectfully, I disagree with Jason Fried, David Heinenmeier Hansson, and Michael Mothners. Firstly, it seems obvious that all of them have only been involved in growing or starting their own businesses so I’d suggest their experiences in different types of businesses with different owners is a bit limited. For instance, Fried and Hansson suggest that business owners looking to sell are generally trying to get acquired. Huh? In the 100 plus business owners I’ve worked with I don’t recall ever hearing about someone wanting to get acquired. That’s just a bit of the authors projecting their experience as a software company and of the software industry overall to all businesses and it just isn’t that way for businesses outside the technology realm. Mothners also owns a technology company so I’m guessing his disdain for exit strategies is based on the idea of companies popping up just to get bought out by Microsoft or Google.
In the real world of brick-and-mortar businesses few owners have that vision. As a matter of fact, most owners have no idea when they should sell their business, how to sell it, or even what it’s worth. What’s worse is few appreciate that if they’re working IN the business everyday instead of ON it their business is worth significantly less once they stop working there. My point is that why make a statement such as, “building a business to sell it is a bad idea” when the negative situations that they are concerned with are probably less than 1/10th of 1% of the total transactions and businesses? There are nearly 250,000 businesses sold in the US each year and that only represents about 20% of the total businesses listed. In other words, only 1 in 5 businesses grossing under $10 million/year will sell. It doesn’t sound to me like building to sell is the problem or you think more people would be able to actually find a buyer.
So what are the real problems small business owners face?
- They don’t know how to build a business. In Built to Last: Successful Habits of Visionary Companies, Jim Collins discovered that businesses that remain profitable for decades (even centuries) remain that way because they are great BUSINESSES not because they have great products. Most business owners focus on delivering a certain product or service without figuring out how to build a great business.
- They don’t know how to distance themselves from the business. In other words, they make the business completely dependent on themselves. If they’re not there working, selling, servicing or whatever, the business isn’t running. That means when they go to sell the business it’ll be worth a whole lot less without them there. Not only that, the only people interested in buying it will be buyers who also want to work in the business not investors. Working buyers generally don’t have as much cash as an investor looking for a steady return on his money.
- They don’t know what their business is worth or how to increase its value. The result of that is they always want more money for it than anyone else is willing to pay.
So what’s the solution to fix all of these real problems that I would estimate nearly 80% of business owners have? An exit strategy, of course. Here’s why an exit strategy is so important:
- It forces the owner to look at how to make the business great. Few people (myself excluded) want to buy a business that isn’t run well. They generally want a business with a strong, steady history of cashflow with minimal headaches and issues. If your primary focus is simply to grow and work in your business it’s very hard to step back and look at the big picture of your business being a finished product that runs so smoothly someone else would love to own it.
- Owners will need to figure out how to remove themselves from the business. You can’t sell the business if you’re required to run it, so an exit strategy will help you focus on working ON the business more than IN it.
- They will have to come up with a reasonable value for their business. Most business owners have an idea of how much they’d like to get for their business when they sell it. Unfortunately, that number doesn’t usually correlate with what it’s actually worth. With an exit strategy you need to look at a reasonable value for your business today and then set a game plan for increasing it’s value to the point where you can sell it for what you want. No exit strategy and chances are you’ll never really look at it’s value. This is very sad because most business owners only sell when they’re ready to retire. In essence, their business is their retirement plan. So if they go to sell and find out their business is only worth half of what they thought, that makes for either a tough retirement or a lot more years of work.
- It forces a time table for the 3 items above. Without an exit strategy with a specific time frame, few owners will ever do the things above even if they know they should. “There’s always tomorrow, or next month or next year to get that done… I have customers to take care of today.”
- Buying, building and selling businesses is generally a much faster system for creating wealth than buying, building and keeping. I’ve explained this in previous blogs so I won’t address it again here. This philosophy is probably what is thought of as a “bad idea” however, in my experience, this generally greatly benefits the businesses being acquired and resold. Why? Because people who are doing this understand how to make a business better. Not just a shell game of cleaning up the books, but a business that takes care of its customers, employees, vendors and owners better. Truly an improved business comes out the other end when an experienced person takes over to increase the value of a business to sell. I’ve written a 5-part series of blogs outlining how someone can go about buying a business and quickly improving it.
In summary, be wary of advice from business experts who have only owned or run 1 business or in a single industry and then attempt to extrapolate their experiences and lessons to all businesses in all industries. The real world, where over 5 million businesses exist in the US, is quite a vast landscape. More importantly, if you’re ever looking to retire or sell your business, you need to work on an exit strategy immediately. Make it a priority to get done this week! Contact me if you have any questions on how to structure a reasonable plan.
To your successful exit strategy, Bryan