- THE MAGAZINE
The ultimate goal of most small-service business owners is to build up their business, sell it and retire on the proceeds. In many cases this is the only “retirement plan” small-business owners have in place.
This may sound like a very simple concept, but in order for it to be successful, the business must be structured and packaged correctly or there will be problems selling it for anything more than the sum of the value of the hard assets (equipment). This is especially true in owner/operator “Mom & Pop” businesses where much of the company’s reputation, production quality and history are built around the direct involvement of the current owner/operator.
There are generally three primary areas that a prospective buyer will be interested in and willing to pay money for: hard assets, infrastructure and guaranteed continuing business. In order to get the most out of the sale of a business, these three aspects must be packaged correctly.
The first piece of the package is pretty straightforward. The value of hard assets such as vehicles, equipment, buildings, inventory and the like can be calculated using various formulas that take into account depreciation, wear and tear, appreciation (in the case of real estate), re-sale values and more. With the help of a good accountant and a little research it is relatively easy to arrive at a value for this part of the package. Obviously, if all the equipment is old, well used, and approaching time for replacement and the buyer will soon need to purchase a lot of new equipment, it will make the purchase of your business less attractive. This is therefore a good argument for keeping your equipment well maintained and up to date.
The second part of the package is the infrastructure of the business itself. This includes the presence of a detailed business plan that includes projected sales goals with historical basis; organizational charts; company policy manuals; written job descriptions; written procedures for every function in the company; supply ordering procedures; forms and paperwork; necessary licenses and insurances; accounting and record keeping systems; scheduling systems; equipment maintenance plans and records; continuing education and training programs; appropriate memberships and subscriptions; and a comprehensive marketing plan. Along with a well-known name, a solid infrastructure is what people pay for when purchasing a franchise package.
By having written documentation of the complete infrastructure, you open up the pool of potential buyers to include those investors who do not possess any knowledge of your specific trade or service. Along with being a part of packaging the business for future sale, establishing a complete infrastructure will help your business operate as efficiently as possible right now. Don’t wait until you are approaching retirement to create a detailed, documented infrastructure for your company.
Guaranteed Continuing Business
The third piece of the package can be less tangible, and is where many businesses fall down in their planning. In many business valuations this is referred to as “good will” or “blue sky.” The reality is that unless properly documented and tracked, this part of the package has very little real value when establishing a selling price for the company. For example, 25 file cabinets full of carpet cleaning customer records have little or no value beyond that of a mailing list that can be purchased for marketing purposes. This is especially true if the satisfaction of those customers was dependent upon exceptional work performed by the owner/operator, who will no longer be with the company after the sale.
What the potential buyer is looking for is assurances that, barring an unforeseen catastrophe or gross mismanagement, the business will likely continue at or above its current volume after the sale. One of the ways of creating real value for on-going business is to demonstrate consistent repeat business that would be expected to continue after the sale. The best way to do this is through contracts for services, especially in the case of commercial cleaning.
Another way to establish the expectation of continued business is through special alliance agreements, such as preferred vendor agreements with insurance companies, government agencies and the like, or with referral agreements with retail outlets. In the case of a primarily residential service business where contracts are less common, records that show repeated services for customers, the typical repeat cycle and the average job size can be used to mathematically calculate a reasonable expectation of future business.
It is important, when possible, to demonstrate that repeat business is not dependent upon a specific individual personally providing the service. The number of years the business has been in operation also helps establish the expectation of continuation after the sale. Many times, to minimize the purchaser’s concerns about business continuing beyond the sale, the seller agrees to remain in the capacity of consultant for a period of time. This helps insure a smooth transition and provides the new owner the opportunity to be properly introduced to major clients.
The dream of someday selling a business and retiring on the proceeds will only come true if the business is packaged for sale so that the selling price is an accurate reflection of the years of hard work that have gone into establishing it. Package the business based on assets, infrastructure and the prospect of continued business and good will, and you will get maximum value and return on your investment.