Ross Golightly, Managing Director of Sphera Consulting, shares some insights on growing your business into a saleable asset.
There is a school of thought that says “the only reason you start a business is to sell it”. Whilst I don’t think it’s as black and white as that, I do think there is some merit in the statement.
That’s because exiting a business provides the greatest financial upside an entrepreneur can ever realise.
Your business will inevitably shape its own exit (and increase its sale value) by you doing certain things correctly over time. Here are 3 things to think about for starters:
1. High Profitability
Valuation is based on many things but is primarily a multiple of earnings. It’s an unavoidable fact that highly profitable companies (that are viable going concerns) attract high valuations.
2. Build a Self-Managing Company
One key question an acquiring business should always ask is: “what are the consequences of removing the owner”?
If your business is highly dependent on you (or “owner-dependent” as it’s termed) for everything to work then it has limited value. Ask yourself this; if you have to be there all the time, do you have a business or a job?
Your business should be systems-dependent with clearly defined (and written) operating procedures so that it can work without you. It should have a Management Team and an Operations Manual.
Then you have a truly saleable going concern where your removal has no (or limited impact) on results, performance, operations and decision making.
3. Predictable Revenue
An acquirer is buying into the future earning potential of the company, rather than its historical growth.
If your revenue is largely predictable (i.e. customers buying retained services, subscription based revenue streams, consistent retention of key customers, contract or tender wins etc.) then this can create significant value.
Predictable revenue can also come from making it difficult for your clients to exit (i.e. they become very reliant on a product/service you offer that is integral to their business) and from you ensuring your business is positioned in growth markets that will continue to grow.
Ultimately, whether you have considered your own exit or not, remember that a business without an exit strategy has less pressure to grow.
And selling your business is the biggest financial transaction you will ever make.