THow to Build a Business and Sell it for Millions (2010)
Planning to sell is all about building – from the very start – a business that people want to buy. These include profitability, competitive edge, scalability and sustainability. It is important to have a 1) successful business plan, which when properly implemented, produced a 2) profitable business model.
Developing a successful business idea
1. Create a list of every major thing you need to operate your business.
2. List all of the key employees you will need.
3. Survey the market for prices of similar products and services and then set your prices with a clear reason why your prices should be any different from your competitors’ prices.
4. Project the revenues, expenses, and cash flow for your business for the first 3 years of operation.
5. Describe what advantages your competition has over you and what advantages you have over your competition. What is your competitors’ likely response to your business and your plan for maintaining advantages over your competitors.
6. Describe your competition in detail, what products/services they sell and at what prices and how they will affect your ability to sell your products and services at your predicted prices.
7. Explain your source of capital to start and continue your business, as well as the contingency plans for cash reserves, line of credit and raising additional funds.
8. List the various potential locations for your business and the pros and cons of each location, including different costs and revenues associated with each location.
9. Research and describe what business or investor might want to buy or invest in your business and why. How you will shape your business to appeal to these parties.
10. Determine the best legal structure for your business.
11. Describe where the market for your product is headed, what forces are driving this market, and what strategy you will employ to address these forces and the changing market.
If you have no competitor edge, and you are making money, it is best to consider to sell your business soon.
Scalability is the ability to grow your business. It is about how big you can get. If your business is built for growth, they’re going to jump at the chance to buy your business. You can sell, reap the benefits and relax. Scalability is a mind-set. It is about constantly making decisions that creates bridges, not barriers, to growth.
Scalability attributes can be at the following :
1) Supply of goods
3) Banking and borrowing
Many of the best and brightest know what they’re worth and they’re going to insist on that – and often more. Research the market and prepared to top it. You almost can’t overpay.
It is possible to start small and without much cash, to build a business from scratch and make it sustainable. While you need to have persistence in your business, you need to be in good health.
Have a vision. People want to be part of something bigger than themselves – like a movement. Vision changes a job into a mission. If you have some self-destructive behaviour, you may need business counselling.
As you grow your business, you need to produce the financial reports and forecasts that will tell you whether you’re making more money, or losing it and whether demand is growing or shrinking. If your business is a car, you need a rearview mirror, a dashboard and windscreen to tell where you’re going.
- rearview mirror to tell where you have been – revenues and expenses, assets and liabilities.
- Dashboard to tell how car is running – profitability, productivity and risk
- Windscreen to see where you are going – metrics an financial forecasts.
A rearview mirror tells you where you have been, example your balance sheet and operating statement show where your business have been. Are your in debt? Are you making money or burning it?
1. Balance Sheet – shows your assets and liabilities at a particular moment in time. From the balance sheet, you can tell a few important things :
a. Quick ratio or acid test – you can divine whether you can meet payroll or other bills if there is a sudden shock in your business and no money comes in.
b. Debt ratio – you can discover whether you have taken too much debt in relation to your assets.
c. Average collection period – you can tell how long your business takes to turn sales into cash.
d. Operating statement – shows the money coming into the business (revenues) and the money you are paying out (expenses) over a period of time. You can compare your operating statement from one time period to another, you can see important trends. Example if revenues are up, but your cost of labor isn’t, then your workers might be more productive than they were before.
A dashboard tells you how your car is running, how your business is doing. There are a few measurements that you can get from your business dashboard.
1. Net profit margin ratio
– how profitable are you? Your net profit margin ratio shows how much money you are making on your sales.
2. Return on investment ratio
– What kind of return are you getting on the money that you and others have invested in your business? Your investor or purchaser will want to look at this number to see how your company stacks up – profitability-wise against your competitors.
3. Inventory to sales ratio
– Is your inventory getting too bloated? It gives you a warning signal about recent swings in your inventory.
The windscreen helps you see where you are going. This tells you a lot about future business. You need to discern critical data – called metrics. Metrics are key indicators that predict future events.
Example 1: if you are in environmental cleanup business, a good early indicator of future demand is the number of new building permits. Before builders start grading and excavating, they need to test the soil for contamination. If there is an environmental problem, they’ll call companies like yours to clean it up. The more projects they start, the more business there will be for your industry.
Example 2 : If you sell anything for the home, like furniture etc, the number of new housing starts has historically been a good indicator of future sales.
Once you have identified the appropriate metrics for your business, develop a system to track and report these indicators. It can be as simple as keeping track of the number of phone calls you get each week from potentially new customers inquiring about your services.
As businesses grow, you need to know how to manage risk :
1. Assess risk – at least once a year assess the risk to your company. Your outside advisors, especially your insurance consultant can give you a good idea of what threats lurk.
2. Assign probabilities
3. Predict the harm – how bad it will be.
4. Respond. Address the risks – worst first.
5. Don’t go to sleep. Risks change over time. Don’t stop evaluating and responding.
If the law is a jungle out here, here is the machete :
1. Survey – know what’s out there. Scan the universe of laws that surround your business. If you are going to build a business of any value, if you are really going to sell it for a fortune, it can’t be breaking the law.
2. Audit – determine what you need to do to comply.
3. Plan – create a compliance program.
4. Test – monitor your compliance.
No planning process should begin without a clear understanding of your goals. Better to implement a good plan than seek a perfect one. To ensure that your planning meetings are productive, set an agenda and a time limit for every meeting.
It is important to have a good contract for 2 things.
1. It commits everything important to writing, which keeps you out of court most of the time.
2. If you go to court, it helps you win.
Although you are not a legal expert, you can still audit a contract to see if it’s good :
1. Make sure contract contains all key terms of the deal.
2. Confirm people are willing to sign it.
3. Check for redundancy.
4. Watch for excess.
5. Inspect for irrelevancy.
6. Make sure the contract addresses the what-ifs.
There are two types of buyers for your business.
- Financial buyers
– they buy with the goal of buying low and selling high.
– they learn they can make more money flipping a good business than they can with stocks, bonds or real estate.
– they are looking at 20% or more per year on their investment>
– they like to buy a business and hold it for 3-7 years. They are rigorous in their analysis of your earnings, now and in future.
- Strategic buyers
– they want businesses that add synergy or some special edge.
– they can be your competitor.
– they often pay more than financial buyers because they expect your business to create synergy and pay off in multiple ways that trump just the value of your earnings.The bigger your buyer, the better.
There are a few fundamental valuation method of a business.
1. Replacement cost – amount of money a purchaser would spend to duplicate your business. This method is rarely used as a prime way of valuing a business unless business is bad and you are facing a distress sale.
2. Comparable value – places a sale price on a business based on what other similar businesses have sold for. It has limited use in selling business.
3. Income method – the best and most common way to value a business. The buyer first figures out how much the business makes now and will in the future. Each buyer applies their own secret formula to determine how much they will pay for that stream of income.
Pricing your business involves formulas and logic. There are sure things – profitability, a competitive edge, scalability and a great team – that get you more money. But the world around you is chaotic and fickle. Sometimes you win the game with a wild card.