3 Key Points in this Episode:
- The purpose of starting a business is to one-day sell that business.
- When you build a business that produces predictable results, operates independently of you the owner, and scales people will want to buy the business.
- You must develop a profile for your ideal buyer.
The week is almost done. What have you been able to accomplish this week in your business? I hope you had a great week.
On Tuesday, my interview with Danielle Grant went live and we talked about your mindset and having a healthy inner dialogue. If you missed it head over to jamieirvine.ca and listen to episode 72.
Today, in episode 73 we conclude the Blueprint of a Great Business Series with one of my favorite subjects. Selling your business for a great profit. We’ve been talking about what it takes to build a great business but now we turn our attention to preparing for the final sale.
Prepare for the Final Sale
Many people assume that their family home will just go to their kids, but that doesn’t always work out. It’s very similar with a business. Most self-employed people are so focused on just surviving that they rarely think about what they are going to do later in life.
Having a succession plan is a critical component of building a great business.
I want to remind you that not everyone wants to sell their business and that’s okay. Some people want to build legacy businesses that they will pass on to family members. Others plan on working till they die because they love what they do, and I say, “to each to their own”.
However, even if you do not ever plan to sell your business, building your business so that it can be sold is what is important.
Let me tell you a true story.
When I was running my contracting business, I was in my 30’s. My wife and I had figured out that for our business to be a great business we needed to create systems. Michael E. Gerber the author of the E-Myth Revisited had turned us onto that idea.
We had come to appreciate that producing a predictable result and creating systems that allowed us to operate the business independently of us was a critical factor in achieving scale.
As a natural delegator and someone who never wanted to do the hard physical labor that our services demanded this was not just a revelation, it was music to my ears. Being the leader and having people doing the work was almost too good to be true.
At this point, we thought we had it all figured out. This feeling of accomplishment was reinforced when I got a call from a competitor. Phillip Moore (not his real name) was a 55-year-old competitor who had been in business for over 30 years.
The purpose of Phillip Moore’s call was to ask me one question:
This is what he said, “Jamie, your business is remarkable, you have only been in business for a few years and you are growing so quickly, would you be interested in buying my business?”
I agreed to meet with him and what happened next reminded me of how much I still had to learn.
Phillip explained that the years of demanding work had taken its toll on his body and he was close to needing to retire. Everything sounded good, so we got to the business of buying his business.
When we did due diligence, we discovered something surprising. Despite his business having decent revenue and reasonable profit, his valuation was much too high. At the end of the day, his business was only worth about $5000, yet Phillip was asking much more.
How is that possible?
How could a 30-year-old business with strong annual revenue and gross profit margins be only worth $5000?
My valuation of $5000 was based on the following factors:
- Phillip Moore was the business, he had no employees, only his sons who despite working with him had no desire to take over the family business much less work for me as employees. As soon as Phillip left I would have to hire additional people and train them.
- He wasn’t including his truck in the equipment assets because the business didn’t own the truck, Phillip did. Which meant if I did buy his business, in addition to needing to hire employees and training them, I would have the expense of purchasing a work vehicle. The used tools Phillip was including were worth $5000.
- The customer list he had was worthless because those customers bought services from Phillip, not his business. As soon as they found out Phillip was gone they would put their business out to bid because nothing was under contract. Since we were on their bid list already all I had to do was wait and I would get a free opportunity to win that business. Which is exactly what happened, and my business did win some of those bids on work Phillip had previously done.
Thirty years in business and all Phillip Moore owned that he could sell was $5000 in used tools. I didn’t want to insult him, so I never made an offer and I suggested that his best course of action was to find someone that was looking for a job, to step in when Phillip stepped out. That is what he did and although I don’t know what Phillip got for his business I am confident it wasn’t close to his asking price.
There are thousands of Phillip Moore’s who get to the end of a long self-employed career and have nothing to show for all their blood, sweat, and tears.
Meeting Phillip Moore had a profound effect on me and it should make you deeply reflect on what your ultimate goals are for your personal life and your business.
There was no way I was going to run my business for 30 years, destroy my body in the process, and have nothing to show for it in the end. I was not going to become Phillip Moore, and neither should you.
It was this experience that made me realize that to build a great business you must build something that can be sold for a profit. A value that reflects the time, money, and effort that goes into building a great business. It taught me that even if you hope to build a legacy business and pass your business on to future generations that might not happen. Look at Phillip Moore; his sons had no interest in taking over the business.
There are many reasons to start a business but, in my opinion, the only reason is to make one last sale. The only sale that matters. The sale of your great business for a great profit.
Let’s review why this is so important.
There are two reasons why I believe selling the business is an essential component to building a great business:
1) The first reason is it affects how you build the business
Starting a business with the intention of selling the business changes how you think about the business, how you create the systems that operate the business, and how you build the business to be predictable, independent, and a growing entity.
The business is not a job for you the owner, it’s a business, an entity that exists independently of you. An entity that produces predictable results for many people, an entity that has needs of its own, and an entity that grows and scales.
To truly create and build a great business you must build the business differently. To build a business differently you must think about it differently. To think about the business differently you must have a different objective for the business.
That objective is to sell the business.
2) The second reason is something I call “the Curve”
The curve that every physical thing in the known universe including you and your business is destined to follow.
Sir Isaac Newton said, “what goes up must come down” and I say, “what begins must end”!
The longest business in the history of mankind lasted 1500 years but it did end. Fortune 500 companies on average last only 30 years. 96% of small businesses last less than 10 years.
You cannot escape the curve.
So, build your business into a great business and sell it before the curve takes you and your business to its natural end.
Remember what is truly important is that you build your business so that it can be sold, because one day you may just need to.
How do you plan for the end before you have even started?
Admittedly it is impossible to predict the future and we cannot effectively plan for every eventuality. The only way to do this is to simply decide in your mind that you will build a great business that can be sold for a great profit. Once you have firmly resolved in your mind that this is how you are going to build your business you can develop a profile of an ideal buyer.
This is just like the process of developing a profile for your ideal customer or for a position within your business. You must think about what kind of person or business would want to buy the business you are going to build.
Would they be a competitor?
Would they be a business within your industry but in a complimentary vertical market?
How much money will you be selling your business for?
Answering these types of questions can help you to eliminate many people and businesses and help you to define who your ideal buyer will be. As you develop a profile, start talking to those kinds of people about their plans. Ask them open-ended questions aimed at uncovering what conditions they would require to become interested in buying a business like yours.
Let me tell you the story of how I found my ideal buyer when I sold my contracting business.
To start with I knew my ideal buyer and his business very well. He trained me and helped me start my business, so we had a very close relationship. I knew his business and I knew that he was getting older. I knew he was worried about retirement. I knew that he had entered into business partnerships before and got burned so he and his wife would not be interested in a partnership. I knew that they would need support and guidance to acquire a business. I knew they would pay much more if that support and guidance were built into the deal. I knew that they would pay even more if they didn’t have to find financing to fund the deal.
Conversely, my ideal buyer was aware of all the work I did to create a business that produced a predictable result, operate independently of me and my wife, and was scaling at a consistent rate. He knew my employees and had opportunities to work with them when we had done joint projects in the past.
My ideal buyer and I had conversations about making a deal for over three years before a deal was made. In the end, when the deal was done, and he acquired my business on January 1st, 2016 the merger acquisition went flawlessly. Now as I write this almost two years later I am happy to report that every condition, every payment, every detail of our deal has been met and my wife and I are very happy with the result.
Please, create a profile of your ideal buyer and file it away within the systems of your business. You instinctively will know when it is time to dig out your profile of your ideal buyer and begin the process of the final sale.
Selling my contracting business was the best thing that ever happened to my contracting business. The business that acquired us has grown and now staffs more people than I ever imagined possible only 24 months ago. We recently had a BBQ and all the staff, and their families were invited. As the purchaser of my business and I stood looking at all the families talking and laughing with one another I looked at him and said, “look what we did” and as I write about it, tears of joy are running down my face.
I can’t explain to you the emotion that I feel when I think about the business that I built with my wife. It was only a small contracting business, but it provided my family with a life, it saved construction workers who were laid off in the recession of 2007 – 2009, it provided me with the business experience to write this book, and now it has given you my dear reader, the blueprint to build a great business. You now can go into the world and make a difference, in your own life and in the lives of others.
For that, I will be eternally grateful.
This brings the Blueprint of a Great Business Series to a conclusion. For 10 Friday’s in a row we have covered my 10-steps to building a great business, a better business. If you want the e-book head over to jamieirvine.ca/book and download your free copy today.
So, what is next?
I have a developed a new 3-part miniseries called Build a Better Business – Leaders that Dream. We are going to talk extensively about your role as the leader in your business, why having a dream is essential, and what to do if your employees are not engaged in their jobs.
Next Tuesday, in episode 74 I interview Luke Williams, Luke is going to help us develop a baseline for the vision of our business, a critical part of being an effective leader. You won’t want to miss it.
Have a great weekend.
This episode sponsored by:
Every business needs a website and I have used Gerrit and Trackstar Web Design since 2012 and so should you.
I use Process Street to create systems in my business and I highly recommend that you use Process Street as well.
Thank you for listening and I look forward to working with you soon.