Sell Your Business Without Losing Your Shirt
Prepare to Sell Your Business on Great Terms with Less Stress

"Man looks into the abyss; there's nothing staring back at him. At that moment, man finds his character. And that is what keeps him out of the abyss."

Lou Mannheim, from the movie Wall Street
Source: Wells Fargo Financial Market Strategies

The worst economic cycle in decades might not seem the ideal time to take on any new business project. We have a tendency to hunker down in tough economic times. 'Sales are down, so run lean, take care of customers and work hard,' we reason. 'We've seen these cycles before.'

Times such as these, however, are prime time to position your business for higher value, even if you don't plan to sell the business for several years. Why? Preparing for a sale can increase profit, stabilize your business and give you confidence and a less stressful life.

Example: Document Your Costs (and Impress Customers)

In my experience, business owners know their costs; but few of you use this information to win customers.

Mike runs a company that manufactures building products. The business has great profit margins even though sales are down as a result of slowing home and commercial construction.

The company ships to most regions of the United States. The business location in the north meant high shipping costs to certain regions in spite of the large volume of product shipped.

Management discovered shippers charged vastly different prices depending on location, day of week, volume and weight of shipment. Rather than attempt to make sense of which carrier had preferred pricing overall, the owners developed a shipping optimization application to select the preferred carrier for each specific shipment taking into account these variables. Not only did the Company lower costs, the owners also created data to help win new sales by showing prospective customers total savings compared to competitor bids. After showing one prospect what his actual costs would be including shipping, the prospect stated, "If you run your company this well, I know you'll take care of me." Mike won the bid.

Many businesses and professional practices have much higher value than financial statements indicate, yet in most cases owners can't support it. If this value can be demonstrated convincingly, you will attract better buyers and a higher price when you do sell; you might also prosper after the sale is completed by selling on better terms.

Once you understand what drives business valuations for buyers of businesses and how to leverage value without your constant intervention, your tasks to improve profit and business valuation will become clear.

Author Michael Gerber, in his best selling book "The E-Myth, Why Most Small Businesses Don't Work" writes, "You don't know your business until you've quantified it, envisioning the business as something apart from you, the owner."

The term exit planning has been used to describe many business improvement efforts that have more to do with selling insurance and investment products than positioning your business for sale. It's so much more. Exit planning is intensely operational; done well it can increase sales, profit margins and business valuations beginning in as little as 90 days.

Example: Create a Sales Process

One of our clients makes production tooling, dies and fixtures. The founder calls the business 'a tool and die shop.' He was underselling the business.

Ron's business has developed a reputation for making top performing jigs that improve quality control during manufacturing. Their designs are simple to use yet durable, and the fixtures permit fast sample testing of parts as they're made, so adjustments can be made in real time. The customer saves many times the cost of these quality control fixtures in lower rejection rates and lost production time. Without any dedicated plan, sales are growing.

What if the owner targeted all manufacturing facilities within a two hour drive and called to tell them his company can materially lower their part rejection and production downtime? By sharing data showing 'before' and 'after' rejection rates for manufacturing customers that use his fixtures, it's an easy message to sell.

How would Ron know the number of local manufacturers that have a problem with rejection rates until he asks? Create a list of 100 names. Call 10 names per day. Calculate the number of meetings scheduled per call, and multiply this number by your average quote price per fixture. This new sales number can be your plan for 2009.

Taking on a business-changing project need not be expensive. Most privately-owned companies have an almost complete separation between operating and financial measures in the business. This is the reason franchises are so prominent and successful overall: they've documented the business model and process in such detail that a new owner can accomplish in weeks what a start up business owner would take years to accomplish, while eliminating most failures.

We use eight strategies to improve business value, incorporating: quick hits; valuation- financial statement normalization; sales process; channels of distribution and sourcing; innovation-branding; people and asset leverage; deal structure-financing; and methods of persuasion (negotiating techniques).

Example: Find New Distribution (Revenue) Channels

Bill founded a company that administers physician insurance claims for specialty clinics under contract with insurance carriers. His business designed a solution using enterprise software that applies front-end edits and electronic transmission of claims to make billing far more efficient and user-friendly for physicians and insurers paying the bill.

The business process is a back-office function in a profitable but niche market. When we approached a large computer services provider about interest in using the solution to grow their business with customers in a complementary market we found strong interest, and a project is underway to evaluate leveraging the solution to a much larger customer base.

We've discovered over time that buyers tend to use similar, predictable methods of analyzing companies and discounting for risks. In the absence of other measures, buyers zero in on profit to screen all businesses for acquisition, and they give little value to what is proprietary in your business. By documenting your sales and operations, you'll be able to show why your business is a winner.

To boost value, put yourself in the shoes of buyers. What do they look for in a business?

     1. Operating profit,
     2. Security of these profits, and
     3. Transferability of business operation methods.

#1 Operating profit is the most conventional and important measure of value. Of course a buyer wants a profitable business. Business valuation is the place to start demonstrating profit, but if profit is down or you've reinvested heavily in growth from earnings (as most private companies do), you'll be undervalued. We spend considerable time normalizing financial results and determining how a business owner can show value and increase profit. Using a critical eye to evaluate how your products or services stack up and how much customers need you is a good place to start.

#2 Buyers also value security of profits. They consider: the current and projected health of your business market segment (e.g., 'green' or renewable energy and security services would be 'hot' and print news media would be 'cold'); how you sell, customer concentration and outlook of your largest customers; and your balance sheet ? the ratio of assets to liabilities, working capital and owner equity. The time might be right to clean up your balance sheet, jettison unproductive assets or turn your plant property into cash to grow. You'll also want to think creatively about how to increase sales, lessen dependency on one or a few customers, and secure the customers you have with new products or innovative pricing, terms or contracts.

#3 Transferability of business operation methods is less obvious and often lacking in small businesses. But it is among the most important strategies to improve business value longer term. Most businesses have low hanging fruit in this area, and some great ideas can be prepared quickly and cost little to put into use ? a $35,000 project yielding 6-figure profit increase, for example. Your best opportunities to improve operating methods will come from your present weakness ? such as a new process in your business or documenting a process you already have. Big results can be achieved just by lessening the dependency on you for the business to succeed via better measurement and documentation.

Example: Quantify Your Service

Having started two businesses, I found one of the fun yet daunting tasks to be naming the new company.

My first experience naming a company was with a 3-partner group. We wisely decided to hire a marketing firm to identify names and help us brand the company, and they did it very successfully. Our newly named company and service mark were awarded 'Best New Corporate Brand' in a national juried competition. We were very pleased.

As years passed and our company grew, I continued to feel this terrific name, logo and tagline were distinctive, but I also learned they really didn't generate any business.

Can any name really source new business?

Yes, it can. But not in ways you might think. The use of 'names' that I'm referring to is not your legal company name, or even its tagline, but rather what you show your business as capable of doing ? its proprietary features. You should have data to support the claims.

Our firm has a current buyer search for a company that sells and services insurance products. They sell by telephone, and they call themselves an outbound teleservices business.

Beyond great profit margins, what's attractive about this company is they've been early adopters of selling wrap-around insurance products; these products contribute to large improvements in claims loss for holders of mortgage-backed loans. The company charges more than competitors providing similar services, but by packaging data that validate lower claims loss, their sales results greatly exceed competitors ? a point they make with prospects. The company has grown 20 percent per year with almost $10 million in sales. They have the attributes of a valuable company with staying power: good employees, business process and systems in a market deemed to be indistinguishable, competitive and slow-growth by many business buyers.

What do you own, what is your 'franchise' (your proprietary product)? In my experience, most companies have one or more; if documented they will increase your value in a sale.

Example: Find Revenues in Procurement

Our client uses a preparation material in his manufacturing process. As a result of relationships with his suppliers and customers, he saw an opening to distribute this sourced material in small quantities to select customers that use similar products. By becoming a distributor, he saves his customer money and provides ready inventory while dropping six-figures to his sales line. We have other manufacturing clients who've also used distribution to increase profit and diversify their revenue.

By positioning your business for sale, you will make the company more appealing to buyers. You'll also improve profit and reduce risk in your business. This is good news for prospective buyers, who will reward you with better terms, and it's a great way to enjoy life by getting rid of business risk you don't need to carry.

Here are a few suggestions for getting started.

1. Know your business value. In my opinion, all business owners with sales of $1 million or more should know the value of their business and why.

2. Document your sales. Illustrate sales in a way you can track every day, and prepare a plan to secure and grow them. Almost every business experiences a boom-bust cycle with a key customer. Your plan should address this risk.

3. Determine your one key business weakness and prepare a plan to correct it. Yours might be sales, inventory, debt, customer concentration or personnel (including too much dependency on you). If you drive the company, set a plan to grow beyond this or your business value will suffer and you'll leave a great opportunity behind.

Rexford Cattanach is president of Keats Group LLC, advisors and Intermediaries in business sales, acquisitions, valuations and transitions. Rex is author of the forthcoming book, 'Sell Your Business Without Losing Your Shirt' and the well regarded trade publication 'INBUSINESS.' To learn more about our curriculum-based EXIT PLANNING programs or complimentary 30-minute consultation, or to discuss considerations for selling your business, please contact Rex in confidence at 651-773-8400 or rcattanach@keatsgroup.com

Notes:

1. Business owners can make material improvements in company value in as little as 90 days. Full implementation of our exit planning program will require longer ? usually 8 months for participants of our group forum; however, results can and should be achieved in as little as 90 days for most owners with commitment to the program work requirements.

2. Not all steps will be applicable to all businesses.

All rights reserved, Keats Group LLC exit planning curriculum. Not for duplication without author's permission.

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