Recent reports have shown that as baby boomer entrepreneurs head for retirement, there may well be a torrent of businesses put on the market over the next 10 years.
Whether you are selling your business to a third-party or passing it on to a family member, ideally your exit strategy should be planned from day one. Realistically, this is rarely the case. Why should you plan your exit from day one? The process of getting your business ready to sell can help streamline the business, making it more efficient, systematized with proper processes, policies and procedures in place.
Most first facility owners are excited about the challenge of launching their businesses. One they often forget is that decisions made on day one can have huge implications down the road. You see, it’s not enough to build a business worth a fortune; you have to make sure you have an exit strategy, a way to get that fortune back out.
When you are getting ready to sell, you need to be able to get the best price, so you need to have as much ‘value’ in your business as possible.
The most common reasons found for people being complacent about exit planning are:
– A failure to recognise the long and short-term benefits of exit planning
– Fear of life beyond the business
– Inability to make the separation between their own identity and the businesses identity
– The issue just seems too big and day-to-day activities are given priority over strategic planning
For those of you who like to plan ahead, (and for those of you who don’t but should) we will be discussing ways to get your business ready to sell. Even if you have no intention of getting out any time soon, making sure your business is always ready, not only means you will maximise its value, but more importantly, when the time comes (whether it’s planned or not) it also means you can do things on your terms and no-one else’s.
When you are getting ready to sell, you need to be able to get the best price, so you need to have as much value in the business as possible. Value is not just about the amount of profits your business has made, it is also about whether someone else will be able to run the business successfully without you. A comprehensive valuation by an informed self storage industry expert can act as the first step in maximizing its value and increasing its chances of reaching its optimum sale price. Such a valuation can act as a health check for the business highlight its strengths and exposing its weaknesses.
Those that have taken action are often pleasantly surprised to find immediate benefits. Their concern about diverting their time from what seems more urgent and important quickly turns to ‘why didn’t I do this sooner?’ The immediate benefits to businesses that have gone through this process include:
– More profit
– Higher efficiency
– Greater peace of mind
– Clearer focus
The valuation process can help the facility owner think objectively, like an investor. Generally the purchasers of storage facilities fall into one of the following categories:
– First time self storage investors looking for a business to operate themselves
– Industry participants, competitors
– The current management team (within the family or the next generation)
Each purchaser will have a different perspective on which qualities are considered attractive. For example a first time self storage investor may be attracted to a business with a highly qualified and experienced management team who can assist in running the business following the departure fo the vendor. A competitor on the hand, who wishes to add your facility to their portfolio may be more interested in the are or market that your facility is situated in and the demographics of that market. Acquiring key assets such as building and equipment, customer lists, technology and the like are much more tantalising than the presence of an expensive management team.
By recognising the key characteristics of potential purchasers and the value drivers sought, it will become easier to groom your business towards this market. Generally however, businesses that attract high sale prices are those with the following characteristics:
– A comprehensive understanding of the industry to which they belong, and the market in which the facility is located
– Strong protected revenue with sound profit margins
– A strong management team that is not heavily reliant on the owner
– Comprehensive and detailed financial records
– Procedures implemented so that each area of the businesses processes are documented
Facility owners who understand the desired value drivers are better able to identify and highlight them in their business prior to sale. Similarly, it is crucial to identify issues, which may challenge the sale or depress the sale price. Business owners who are unprepared for sale often only discover such weaknesses during the purchasers due diligence, which will invariably have a negative impact on their position in negotiations. Some of the most common impediments to sales are:
– Gross profit margins are too low. Businesses with low gross profit margins relative to the industry are considered more vulnerable to change
Static or declining turnover. When selling the business remember you are selling to the future not the past.
– Low market share. Generally businesses with a large market share enjoy a higher sale price.
– Lack of statutory compliance. In areas such as OH&S this can be a big concern for purchasers.
– Obsolete technology. Management software, security and the like are big factors in the industry.
– Goodwill is not transferable. It is crucial to ensure key members of staff are trained to ensure goodwill is not lost when the business is sold.
– Inadequate financial records. Purchasers are generally wary of this.
The first step in rectifying weaknesses is in their identification. As such a thorough review of the business should be conducted. A professional advisor can facilitate this process through undertaking preliminary vendor due diligence and conducting an indicative valuation to assist in the identification of any impediments and the implementation of strategies to minimise their impact. Some impediments to sale (when identified) take little more than common sense to rectify, while others can be considerably more challenging. It may come as no surprise therefore that they will require different amounts of time to address.
While some concerns may be very quickly remedied, it is of utmost importance that adequate time is allowed for benefits to be realised and evaluated. Generally, the biggest determinant in achieving a favourable sale price is the businesses bottom line. Having implemented strategies to improve the value of your business it is important to allow at least a year for the improvements to be translated into your financial results. One of the biggest and most common mistakes make by owners is to leave preparation of their business sale to the last-minute.
Business owners spend time and money presenting businesses products or services for sale: Why not give the same care and attention to the business which houses these products or services? A timely and comprehensive analysis of the business should give the owner the necessary tools to prepare the business for sale and increase its value long before the decision is made to sell.
The problem with many business owners is that they try to sell a business that isn’t ‘ready’ and end up getting a fraction of its true value. To maximise the value in your business, you need to have most of the day-to-day activities systematized and thoroughly documented. Each person in your organisation needs to have a clearly defined role, job description and designated tasks and procedures. New owners want to buy a business that will be able to run without you. This means that other staff members need to be capable of running it. You need to start preparing your business several years before you wish to sell, so it is able to operate in ‘auto pilot’ mode.
By systematizing your business and having well-trained staff, you will be able to maximise the value of your business when you do finally sell…and the new owners will fit comfortably into your business, and make the profits that you previously enjoyed.