Are you considering selling your business?
If your business is reliant on you then you are likely de-valuing your business!
This guide will cover the steps to systemise your business and improve the offer you are likely to get.
Most businesses are heavily reliant on its owner and therefore offers for the purchase of the business are likely to be lower and staged over a period of time via an earn out period to avoid the risk of paying lots of money for a business that has no value without the owner. For a service based business expect around 2.5 times net profit with a small upfront payment and then an earn out period of 2 or 3 years with set targets to reach along the way to receive the rest of the money.
These steps help change how potential buyers will view and value your business.
Step 1 – How reliant is the business on its owner(s)?
Chances are like most small businesses if you remove the owner for any length of time beyond a couple of weeks it all falls apart. This is often due to not having good systems in place.
Identify the areas that the business owner is currently responsible for and how likely and easily they would be covered in their absence as things currently stand.
Every process that goes on should be considered from winning new work, invoicing customers, dealing with complaints and completing technical tasks.
Step 2 – Record the processes
Chances are the first problem with removing reliance on the business owner for the above tasks is the processes are all in the business owners head.
Nobody is every going to be able to take on those tasks in your absence if they have to ask you each step. Get them recorded. There are numerous ways from written processes to screen captures to videos and even voice recordings.
Step 3 – Train people to undertake the tasks
There may be tasks you do not want to let go of and there may be others which you would love to but not sure how. Now you have recorded processes on how to complete these tasks that is easier than ever. People though are going to need a degree of training to be able to do the tasks.
You need to identify at least one person who can take on each task and then train them using the process that has been recorded. By using the process you can see how accurate it is.
Step 4 – Test the systems
Now is the part that seems scary but really isn’t. It’s time to test it out.
Let go of one or some of the tasks. You aren’t allowed to help unless absolutely necessary and the recorded process must be followed. If it means the business owner has to be out of action for the day to test this properly then so be it.
Step 5 – Make improvements
Now the testing phase has happened you will most likely have come up with some issues. It’s likely it’s in the processes as it these are written correctly and followed correctly it cannot go wrong. Check if the processes were followed correctly and fix any errors. If they were not followed correctly and are clear, then establish why not and re-train.
Step 6 – Systems for all processes
Now you have removed the business owner from the need of essential tasks within the business you can now start doing the same for other tasks and processes within the organisation. Think what would happen if someone got hit by a bus – what tasks do they do and how do they do them.
You have now built a business that is far more attractive to any potential buyer. They can be convinced through the systems you have in place that if they buy the business and you leave on day 1 it can still operate to a successful level. You can even demonstrate this through the negotiation period by you as the business owner stepping out of the business to prove how good the systems actually are.
By having made these changes in your business the risk profile has gone down. It has changed the need for an earn out period as they do not need to keep you interested. They are also more confident that customers are likely to remain as the business will not change on the face of things and therefore you can expect the offer to be more around 5 times net profits. Apart from this you have now just removed a ton of stress off your own shoulders. You probably now have a business that you don’t want to sell as you are generating good profits from less work and less stress.
We are accountants who specialise in systemisation and removing the business owner from the business to be able to generate a more valuable business that is far more saleable. It also means that should the opportunity or time come along to sell the business it is ready to be done with minimal effort or changes needing to be made. If you’d like to find out more about our FOCUS CFO packages that help you with overcoming these challenges then please follow this link or book a discovery call to have a chat.