Why Build a Business Just to Close It?

Why Build a Business Just to Close It?


Every business has one of two destinations: A sale or a closure. Irrespective of what your intent is today, your business will be sold or closed and unfortunately, 96% of businesses started are never sold.

They close, are wound up by fed-up entrepreneurs, dumped onto unsuspecting family members or handed over in some shape or form to even more unsuspecting staff.

To avoid being part of that dire statistic, as a business owner understand how to build a saleable business from the start.

To achieve this, make an effort to understand some basics on valuation and how buyer selection can maximise your price.

Understanding these levers puts you in control and allows you to be the price-maker rather than the price-taker.

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When building a business for sale – something that all business owners should be doing every day – consider carefully the following pointers:

1. Don’t be the business

If you are the business in the mind of the buyer, the sustainability of the business is highly unlikely without your presence. The lesson here is to figure out how to build the business to run without your hand. This means three things:

First, identify limited customer segments that you can serve. Being all things to all people makes you a generic business and no different from your multiple competitors. In such instances, you will be the price-taker and not the price-maker with a buyer facing many options other than buying your business.

Second, once you have identified the customer groups you wish to serve, map out the steps that you need to take to build a system of delivery. This means through all the functions of your business, create a series of activities that, when brought together, create a particular experience for a customer who is dealing with your business. The outcome here is that you will have created a specialist business, one that focuses on very specific customer segments, and the knowledge gained on how to serve and satisfy those customer segments makes your business distinct from your competitors. It makes it special.

Next, you have created a business that is run by systems or operational processes. This is a business that can continue without you. Getting these two building blocks in place means that you can value your business on its continuation, something every buyer is looking for, the promise of ongoing sustainability and profits. For this you will be well rewarded in price.

2. Understand valuation

A business’s value is not derived from stock or debtors. A buyer sees value in two things, one you can price and the other not: The future potential of the business to sustain itself in its current form and the potential of the business given the buyer’s capability and vision behind its purchase.

You can charge a premium for the first and this is how the value of your business will be calculated by a smart buyer. It will be assessed on its ability to continue without you and generate free cash flow from each and every month of trade in the future.

The past will be used as a reflection of what the future holds but it will largely be ignored beyond that. Just as you are less interested in what a share on the JSE has done and more interested in the potential dividend stream it promises in the future, a buyer holds a similar view of your business.

Charging a buyer for what they can do with your business once it’s acquired is of no consequence to them. They will not pay for the ‘sweat of their brow’ to generate additional performance over and above what the business can reasonably deliver on the back of your efforts to date.

Incidentally, love, time in the game, sacrifices, risk, commitment, multiple generation family legacy and all those fine qualities, don’t count in valuation.

3. Pick wisely

The choice of buyer is vital to securing a sale beyond your business’s price tag.

If your buyer is looking for a strategic advantage in buying your business, it’s likely you will be able to add a premium onto its market value. For example, if your buyer hopes to secure your customers as a result of the purchase and then offer additional services/products to your customers thereafter to grow sales, there is a premium value there.

If it is to close out competition and corner the market then there is additional value, should the transaction be allowed. A strategic advantage in the sale of your business to a buyer will claim a premium.

In all cases, you should be able to visualise who would want to buy your company three to five years after you started it. It’s only then that you will have a clear understanding of what business you are in and what makes what you do special.

4. Time it right

Timing in a sale makes a massive difference to price. Timing refers to both your readiness and state of mind – yours not the business’s – and the appetite for businesses in your sector or industry.

Don’t decide to sell when you are tired, exhausted and bored of your business. It’s too late! You will acquiesce to the first buyer and price on the table, especially if the buyer plays you along a bit.

Maintaining a position on value and the advantages of the business to the buyer over a protracted negotiation needs resilience.

If you don’t believe in your business and you are simply offloading it because you have overstayed your welcome and you are ‘wanting to simplify your life’, you will be led by the buyer in matters such as the price and terms of payment to offload your frustration.

Also, there is always a buyer at a price but if you time the sale when the trends favour you, a premium will be won. Imagine trying to sell a DVD store today? Timing is everything.

5. Don’t bet on only one horse

Ensuring that you have multiple buyers on the line is a psychological advantage that enables you to hold
your price.

This is achieved through both sourcing your buyers 24 months before you want to sell and learning what they would typically want ahead of an introduction. If it’s a sale to a private buyer, what kind of person should this ideally be beyond someone who can afford it? Here, you need to think like that buyer.

They are going to buy your business for the lifestyle, then see how your business fits that lifestyle. If they buy to grow further, understand what your business needs to demonstrate to convince them of that future growth.

If the buyer is a corporate, understand how they require reporting and governance to run and build it into your business to fit close to their understanding of these activities. If your buyer in your mind loves ice-cream, give him ice-cream, don’t try to sell him a cake.

Options favour the brave. Do your work ahead of time to inform your broker of exactly the kind of buyer best suited to your business. Then, insist on meeting no less than three. If you have three buyers loving your business, you become the price-maker, not the price-taker.

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Remember this, every business in the world has one of two destinations. A sale or a close. By starting with the end in mind, building for value and creating something that can be sold, you have options. The alternative will simply make you a statistic.

In brief

Every business has one of two destinations: A sale or a closure. Irrespective of what your intent is today, your business will be sold or closed and unfortunately, 96% of businesses started are never sold.

They close, are wound up by fed-up entrepreneurs, dumped onto unsuspecting family members or handed over in some shape or form to even more unsuspecting staff.

Pavlo Phitidis
Pavlo Phitidis is the CEO of Aurik Business Incubator, an organisation that works with entrepreneurs to build their businesses into valuable assets. Pavlo is a regular commentator on entrepreneurship on 702 Talk Radio and 567 Cape Talk Radio. He can be contacted at www.aurik.co.za