We once had a $7 million company that was not sellable. Even though this company was making $2.5 million profit a year for the owner, we had to tell the owner that we couldn’t sell his business. What he had was a profitable job with 25 assistants.
This particular business was in existence for 15 years. It was started like most businesses, with the owner working out of his garage with little more than an idea and a whole lot of determination. Due to his hard work, the business grew over time. Eventually, the owner needed to hire a part-time assistant, who quickly became a full-time employee. Then another worker was hired, and then an administrative person to handle all of the office work.
As the business continued to grow, the owner decided to move the business out of his house and into a more spacious commercial site. Before the owner knew it, the business had 10, then 20, then 26 employees.
From the outside, the business looked very different than when he was running it out of his house. But on the inside, it was exactly the same. The owner was doing all the estimates, and the specific, specialized skills that were required resided in the owner’s head. Every job had to be custom-designed, and the owner would handle every job.
Unfortunately, the owner became ill and did not have the time to correct this very common mistake. He could not exit his business because he did not own a business. He had a job, a very profitable one, but still a job. Buyers do not want to buy a job; they want to buy a business.
Wondering why the most exclusive business brokers are so picky? Because buyers are picky.
It doesn’t matter what industry we’re talking about, how big the business is, or how long it has been operating. The owner could be the only chef in a five-star restaurant, and the food wouldn’t taste the same if a new owner came on board. The owner could be the only merchandise buyer for a retail store with all the knowledge in her head, or if all the professional relationships are based on personal contacts that will not transfer over to a new owner so the look of the store would not be the same.
That’s an unsellable business. We see them often, and they’re unattractive to buyers, which is a big reason why the most exclusive business brokers are so picky. The good news is that if there is enough time – if the business doesn’t have to be sold right away – we can help it get on the right track.
How to Change for the Better
If you want to sell to the largest pool of buyers – the individual buyer – at the highest price, your (the owner’s) job responsibilities MUST be easily transferable. That means that the business must be able to stand alone without the owner. To quote Michael Gerber of the E-Myth, “Work on your business, not in it.” Revenue must continue to flow after the owner exits the business. You wouldn’t expect the business to grind to a halt if the owner takes a vacation, right? Just think of a sale as an extended vacation!
Of course, that’s not to say the new owner will not work hard and serve as an integral part of the business. Rather, the owner’s main role should be general management, overseeing long-term strategies and growth objectives, not becoming immersed in the day-to-day technical details of running the business. Those duties are best left to employees who will likely stay around after the new ownership takes over.
We generally recommend that businesses follow the Rule of Two: Each job in your organization should be able to be performed by at least two people.
Make sure everyone is involved in cross-training so they can easily and seamlessly move into another position, if necessary. Let’s look at one specific examples:
The Dress Shop
The Benjamin Ross Group once sold a dress shop. The owner, who founded the business, had a degree in fashion design and was the main merchandise buyer for the business. She had a great eye for unique designs, and the business was known for one-of-a-kind merchandise. This business could easily have fallen into the category of a job, but it did not.
Why? The owner realized early in the process that she was going to sell the business at some point and started preparing for that day. She carefully recorded all her buying trips, who she spoke to, and who she bought merchandise from. She also kept records of what items sold.
She also brought one of the salespeople with her on buying trips and gave her the title of Assistant Buyer. Even though the designs changed every year, the owner had a detailed record of what her customers purchased in the past and who made the products at the prices that would sell in her store.
While the new owner did not have the fashion background or experience in this type of business, she has been very successful for years because she bought a business, not a job.
Thinking about selling your business?
When you’re the business owner, it is neither wise nor necessary to teach just one person your entire job. You run the risk of that person leaving and taking all your training to your competition, or starting a new company. Another important point to remember is that if you devote all the delegating and training to one person, even if this person stays on, this can also hurt your chances of selling your business.
Why is that the case? If the potential buyer feels that there is only one “key” employee, without whom the business cannot run efficiently, the buyer may be concerned with that person having too much control over the company and may back away from the deal. Or, the buyer may ask to speak to that person before the sale, which will jeopardize the confidentiality of the transaction, which no business owner wants. It’s much better to spread the responsibility around – make sure that each person in your organization is trained in at least one part of every aspect of your job.
If you need help getting on the right track, please contact the Benjamin Ross Group to speak with a business broker who can help you start the process.