At Benjamin Ross Group, we once had a $7 million company that was not sellable. This company was making $2.5 million profit a year for the owner. Yet we had to tell the owner that we couldn’t sell his business because what he had was a profitable job with 25 assistants.
This was a business that had been 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.
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 these all the time. 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.
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 transferrable. 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 a couple of specific examples:
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.
We have sold many service-type businesses, including landscaping businesses, commercial garage-door companies, and automotive repair companies. But we also turn down significantly more than we take on and eventually sell. The big issue with these types of companies is not buying a product, as mentioned above. Rather, it is estimating jobs. If you screw up the estimation of a job and lose money, it doesn’t matter how nice the work is, you are losing money. No one can afford to do that on a consistent basis.
Let’s use the automotive repair business as an example. Some owners realize that if they want to sell their business, they cannot be the main technician or, worse, the only technician. Often, as the business begins to enjoy some success and the owner gets older, he no longer cares to do the physical work, and passes that work on to someone else. That is a great help in selling the business.
However, the owner continues to do all the estimating but does not have a system in place or employees who have been cross-trained. The successful sellers of these types of businesses have delegated or cross-trained someone in the business to do the estimating or quoting jobs. There are many software programs to assist in estimating in almost every industry, so it’s not very hard to put it into place.
The really prepared businesses have a track record of jobs completed. We have seen businesses where the owners have detailed records of each estimate and the actual costs for each job and each technician. This way they can go back, if a similar job comes around, and give an estimate very quickly and accurately.
More importantly, anyone in the company could give the same estimate simply by checking the records. If employees turn over, a really prepared owner could tell us in a moment what an estimate would look like for an experienced technician versus a new technician performing the job. You can probably guess that the owner who spends time making sure he is not the only employee who can perform critical functions will usually sell his business for a premium.
A third example is when the owner is the main and only salesperson. This is very common in businesses where the owner’s role is to generate sales. Many businesses do not have the luxury of having a sales force, so the owner is the sales force.
Business buyers are very concerned when the owner is the rainmaker, the one person who is making sales happen. The big concern for buyers is when all the sales are based on personal relationships that the owner has, the buyer might think that those relationships will not be transferred. There is a very simple way to prevent the buyer assuming that the relationships the owner has, will disappear when the business is sold.
The answer is to utilize a Customer Relationship Management (CRM) tool, such as ACT, Goldmine, or Salesforce. These are software programs that you can buy for a couple of hundred dollars and that, if used correctly, can put hundreds of thousands of dollars into your pockets when it’s time to sell your business.
We once sold a printing company where the owner was the only salesperson. This was a very profitable company with two pressmen, three graphic designers, two delivery people, and two administration/customer service employees. A very well run, profitable business.
However, every buyer who was exposed to the business had the same first question: How do I know that I will be able to keep all of the customers when the owner leaves after the sale?”
In many cases, this key question could diminish the chance of a sale, but this owner had the right answer. Every contact he made was recorded in ACT. Every quote, every job order, and a complete history of all contact and records of all conversations were recorded in ACT. We demonstrated to the buyers that it was not just the salesperson making things happen. There was a record of every conversation the customer had with one of the customer service reps, a record of each delivery and what transpired, and when each follow-up call from the owner was due for the next order. This might seem like a lot of work, but it really is not. The Benjamin Ross Group utilizes this system – we could not run our company any other way.
These guidelines will also help increase your profitability and make the owner’s day-to-day job easier. Even if you have no plan to sell your business, either soon or in the distant future, these are strategies that you can put in place, at little or no cost, that will dramatically improve your bottom line.
Here’s another suggestion: If you do not have the payroll flexibility to support a large staff, consider utilizing subcontractors to handle some of those responsibilities. That way the new owner will have an infrastructure in place to keep the business running smoothly after the sale.
We have sold companies where the owner was the only employee and all the functions were outsourced. For example, the Benjamin Ross Group once sold a manufacturing business that had just one employee, the owner. All the products were outsourced to two different manufacturers, a primary and a backup. Remember the Rule of Two? It applies to vendors as well. Don’t put all your eggs in one basket. What if that manufacturer has financial difficulties or suffers some kind of natural (flood) or manmade (fire) disaster and is out of business for an extended period of time? What will you do to keep your product moving?
All the administrative duties for this manufacturer were outsourced to a company that provided secretarial and accounting functions. All sales were outsourced to independent reps. The products were even direct-shipped from the manufacturer to the end user, so no trucks or warehouse was required. This case might be at the extreme end of the spectrum compared to most businesses, but outsourcing can be used in almost every business to change fixed costs into variable costs and to avoid the problem of the seller being the technician.
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.