Entrepreneurs create and grow businesses. Eventually, most will want to exit that business, at least partially. Perhaps your dream is to sell your company to a third-party. Perhaps you want to be able to sell the company to a key employee, or even to have your children buy the company from you. Perhaps you just want partners to buy in and take some of the burden off your hands. Unless your goal is just to shut the company down when you’re done, or to give the business to your children without taking any significant cash out for yourself, you will want your company to have value.
Companies don’t just intrinsically have value.
You have to work intentionally to create value.
Creating value is not something that happens overnight. Creating real value in your business takes time – a few years at least – and to be successful you need to understand what factors prospective buyers or investors and their professional advisers (especially their lenders) will be looking at to determine your company’s worth (let’s just call all of them ‘buyers’ for the rest of this article). The first thing you should note is, when these buyers start looking at your company’s financial and legal information, they are not going to look just at the present year and your projections. The buyers are going to be looking at historical data – 3-5 years at a minimum – and they are looking for trends and for evidence you have done something to artificially improve the company’s financial picture just before the sale. The buyers will look at historical data because it is harder to fake several years.
As an entrepreneur who wants to realize value for your business, then, it is imperative that you start building value early. In any case, several years before you think you will want to sell your company or otherwise get some of that value (my friend Brad Cunningham calls it ‘taking some of your chips off the table’. Brad, in addition to being a successful serial entrepreneur, is a poker player).
Here, then, are my top ten ways for entrepreneurs to begin to create that business value now:
- Show a Profit. Your tax adviser will disagree, but this is the most common mistake entrepreneurs make. Small business owners reduce their annual profit to zero every year and are shocked when they are told their company isn't worth anything.
- Focus on Revenues. It isn't all about the bottom line – the top line matters as well. Buyers will want to see consistent gross revenue increase over time. You can’t get comfortable – if you want to sell eventually, you must continually grow those revenues.
- Maintain Good Corporate Records. Whether you will eventually sell assets or your company as whole the buyer will be buying from your entity. Most likely, you own either a limited liability company or a corporation. Make sure you have all your corporate records in good shape early.
- Protect Intellectual Property. All businesses have intellectual property, even if it’s just a trademark for their name or slogan. You may also have copyrights or patents. Act early to actually file for formal registration of all your intellectual property.
- Keep Contracts up to Date. Most businesses will start with some contractual relationships – with suppliers or vendors or customers or landlords or tenants or contractors or employees or even with owners. Someone in your organization needs to have all of your contracts organized, available and kept up to date, and make sure they are renewed when they expire.
- Attract and Retain Good Employees. Companies don’t make things, sell things or perform services – people do. If you want your business to have value, it must have good people. Nothing will sour a deal faster than the buyer getting the feeling that employees are unhappy, disgruntled or unproductive. Treat your rank and file well and make sure key employees are not only happy and well compensated but also that you have protected the business with reasonable employment agreements.
- Identify Customers. In some businesses, this one is easy – you may have only a few large customers. Often, though, you may have many customers, hundreds or even thousands. A buyer is going to want information on your customer base and buying habits. You should take steps to identify customers, track their spending and habits, and nurture relationships with key customers if you want to build value.
- Professionalize Management. There comes a point in the life-cycle of the start-up where the founder (or founders) cannot do it all anymore. You must make the transition from entrepreneur to CEO, and hire some key employees to take over key management tasks. You go from doing it all to managing those who do it. This can be a tough transition, but to realize significant value from your business, it is a transition you need to make.
- Replace Yourself. The last step of professionalizing your management is to make the final transition from CEO to owner. You may not take this final step before you sell, but you should be prepared to. If you can demonstrate to a third-party buyer that you have a successor CEO already trained and in your business, you open the door to potential buyers that want to buy a company, but not a job. If you are selling to a key employee, you need to be able to show that employee’s bankers or backers that he is up to the task of filling your shoes. If you can’t do this, be prepared for a buyer to demand that you stick around after the sale as an employee – exactly what you became an entrepreneur to avoid in the first place.
- Know Why You’re Leaving. I learned this last one from Brad Cunningham, who has successfully grown and sold several businesses. Brad says he is always asked why he is selling and getting out, and that his answer is important. The buyer wants to know you’re not a rat jumping off a sinking ship – especially if you are selling before you’re over 65. Being clear on this answer will also help you deal with the almost inevitable post-deal blues.