Want to sell a business? Time to think big
The key to selling a business for the best price is to think big before you’ve even started the venture.
According to MYOB research, two out of every five small business owners aren’t making any contribution to their superannuation – supposedly relying on selling their businesses to provide their retirement nest egg.
The problem with this tactic (aside from not paying super, which you should totally do), is that many owners approach selling their business in an ad-hoc fashion – leaving themselves and their retirement open to the whims of the market.
But if budding business owners were to approach getting the best price for their business in five or 10 years from their exit – then they’d be in a much better position.
“I don’t think there’s a business owner out there that wouldn’t say that they’d do certain things differently or make different decisions if they had their time again,” Simon Bedard told The Pulse recently.
He’s the founder and CEO of Exit Advisory Group, which helps businesses exit when the time is right, and said some businesses (particularly at the smaller end) made the mistake of thinking about their businesses like a real estate play.
“Selling a business is not like selling real estate. People don’t walk into a business and fall in love with the kitchen and bathroom, and agree to pay more because they’re emotionally attached,” said Bedard.
“Businesses are less emotional, particularly when you are dealing with a seasoned buyer.”
The best kind of buyer, he said, was a strategic buyer.
Why strategic buyers are more valuable
Broadly speaking, Bedard said there are three types of buyers:
The lifestyle buyer, the financial buyer, and the strategic buyer.
The lifestyle buyer is someone looking for their next gig, and they want to work in the business for a period of time, which could be until their retirement.
A financial buyer is someone looking for a place to park some money and are primarily driven by return on investment.
The strategic buyer, however, is much more valuable.
This is because they see the potential purchase as a way to enhance their own business by offering a complementary product or service, or take a competing product or service off the board – and they’re willing to pay a premium for the strategic value your business brings.
“At the end of the day,” said Bedard, “most people are going to want a strategic buyer, because your business will be worth more to them than it would be to just a financial buyer.”
“Financial buyers…are only going to strip you down till you wonder whether there’s enough money in this for you or not.”
The key to attracting this kind of buyer, said Bedard, is to think about how and when you’re going to exit your business and plan accordingly.
Catch the wave, don’t create it
Bedard said the best chance somebody who wanted to sell a business in five to 10 years had was to think about the big trends expected to hit the market in that timeframe.
“For example, look at what’s going on with disability in this country,” Bedard said. “We have the largest, most well-funded disability program in the world.
“There are companies and countries watching Australia right now to say, ‘Let’s see how this thing goes’. I’m seeing companies out there very actively moving into this space and understanding what it even looks like in five to 10 years because there’s an enormous future there.”
It’s about putting a theoretical exit date on your potential business, and then forecasting out from there to figure out what the big trends are going to be.
“Try to start a company in an industry that has enormous growth prospects,” said Bedard. “A lot of startups think they can create a market, but with a few exceptions, that’s not true.”
But of course, it may seem glib to simply say, ‘Just predict what the world is going to look like in 10 years’ – there’s an art to getting it right.
Bedard suggested two approaches to forecasting.
“One is top-down, where you’re looking at all those macro-economic indicators in the economy, and where all the big money is moving and being invested.” he said.
Then there’s the bottom-up approach.
“This is about understanding what’s going on in the street. What problems are you seeing, and what the prospective customers actually telling you” said Bedard.
Somewhere between those two approaches, you’ll find wisdom that can help guide your next opportunity.
“If you take this dual approach,” said Bedard “you’ll have a much better chance of catching the wave and creating something that may be of real interest to a strategic buyer.”