Did you know that according to Exit Planning Institute's report State of Owner Readiness, 70 - 80% of businesses will NOT sell?*
I was flabbergasted at this figure. When I think of how a business owner thinks of his business as a part of his nest egg, there will be many baby-boomer business owners that will be surprised and disappointed if they fall into this group. I imagine the risk that their business would not sell is not something that has occurred to many business owners. The good news is that 20 - 30% of businesses will sell. The question is, which group are you in?
So why wouldn't a business brought to market sell? The report says there are 6 million baby boomer owned businesses. Some 4.5 million baby boomer business owners are looking to transition ownership of their businesses in the next 10 years.* That great supply of businesses for sale is likely to create a “buyers’ market.” In a market with limited buyers and many sellers, the buyers will not only have the opportunity to drive purchase prices lower; they will also be able to be choosier.
Buyers of your business will be looking for one main thing: future cash flows. But they will be looking at these cash flows through a lens of “Business Attractiveness.”
How attractive is your business?
Let’s say someone is looking to buy a farm business. They are attracted to idea of farming, something they always wanted to do. They are attracted to the idea of farming, a barn, tractors, a workshop, planting and harvesting crops and maybe raising some farm animals like cattle and chickens. So they go out looking and they find a couple of farms for sale. They read about the farm operation and they are attracted to it. Next, they want to come out and see it. Remember, they are buying future cash flows, and they are also buying the enterprise that produces these cash flows.
The lens they will see those cash flows coming through is a good business. They drive up to the first farm. You may have seen a farm like this example: they drive through the countryside and find the driveway, but the excitement quickly fades as they see a dilapidated barn, one that is in disrepair, collapsing on one side, roof is disintegrating, fresh paint hasn’t been applied in decades. They look around the farm yard and there are broken down farm implements, dead in their tracks, weeds growing up around them. What happens to the level of attractiveness? I would say that the buyer’s interest is going to wane quite a bit! Now contrast that business with one that when they drive up, the barn freshly painted and the yard is all tidy, a little oil sprayed on the gravel to keep the dust down. There is a parking area and they go to it and as they exit the car, they think, now this is an operation I can see myself owning!
I was at a business owner’s office the other day. I asked how long some of the things in his office had been there. Some things have been on the shelves for years. I asked what they were for and why he had them. He said, “It had been an idea I had originally, but now I just walk past it each day, in fact, until you pointed it out, I haven’t really even seen these items in years.“ That is true for a lot of things in a business.
They are blind spots - things that are there but we ignore them and we eventually become used to not seeing them.
I am not talking only about visible things. The invisible blind spots that have to do with your financial operations, what you spend, subscribe to, and pay people for. I am talking about systems and procedures and plans. I am talking about the way you conduct your business. I am talking about the lifestyle expenses that may run through the business.
If the buyer can get past the physical aspects of the business, they then dig deeper into the less visible aspects. I suppose it is like dating. We are first physically attracted to another and then we dig in to find out who they are. If you can’t get past the physical, well the deal is dead at the starting gate.
Your business is attractive to a buyer if you have systems in place, like marketing plans that produce regular and countable leads, a process to develop leads into prospects, and a defined sales process that demonstrates reproducible recurring results in converting prospects to clients. How your team interacts and gets things done is another aspect of attractiveness. If everything has to flow through the business owner, and new clients come aboard only because they know the business owner, it makes it hard for someone to come from the outside and reproduce that - instead, if you run the business from the outside rather than from within, it can be perceived as more attractive and valuable.
Of course, the numbers tell a story too. Someone who looks at the numbers and sees a lot of personal expenses running through the business wonders about commingling and wonders if that is a business they want to buy?
To be a part of the 30% of the businesses that are likely to sell in the next 10 years, you want your business to be attractive. We all have blind spots, so first start with a Business Attractiveness Assessment. Find out first where you are today. As a part of the process, find out what things you can do to improve your attractiveness score and create an action plan you can implement with your team to make your business more attractive today to a buyer in the future.
Click here to get the Exit Planning Institute’s State of Owner Readiness, a report that benchmarks lower middle market businesses and educating owners on the differences of "attractiveness" and "readiness."
Mark C. Hegstrom is a Certified Exit Planning Advisor (CEPA). He is able to help business owners understand where they are today, where they want to go, and ways to create financial planning for their business exit objectives.
*All statistics sourced from the 2017 Exit Planning Institute’s State of Owner Readiness Report for the Twin Cities Metro Area.
Snider, Christopher M. The State of Owner Readiness - Twin Cities Metro Area. The Exit Planning Institute, 2017.
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The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.