Saleable or Scalable
16 Point Checklist on How to Position Your Business for a Genuine SALE or Significant SCALE
Warren Buffett is one of the most prolific business investors of our time. In my humble opinion, Keith Cunningham is small businesses equivalent.
As a student of business and business investing and as an expert in helping owners position their companies for growth with a view for a significant sale or major scale effort… the following is the most comprehensive set of investment rules I have seen.
In my view, these rules provide both a outstanding guideline for business investors, as well s (and perhaps more importantly) a compelling blue-print that can help our current business leaders re-invent business models and shape growth strategies to optimise the wealth creation through their unwavering dedication to success in business.
If you are going to grow your business with a view to sell or scale, wouldn’t it make sense to be completely clear on what a business investor / your potential purchaser is looking to buy…?
Well you are in the right place. So read on.
If you are serious about business ownership and creating wealth, my strong recommendation is that you follow this simple (and enlightening) 3 step process:
We are here to help you make your business more SALE-ABLE and significantly more SCALE-ABLE.
Welcome to your opportunity for creating genuine wealth through business.
Your journey starts here….
‘Beside you on your unique business expedition, every step of the way…’
In order to build a sustainable, scale-able business this is the benchmark for returns. This is going to allow the business to pay down associated debts and ‘reinvest in itself’ driving money back into the business for growth, building systems, setting up the infrastructure, recruiting a General Manager to run the business on a day to day basis and much more. Without a return at this level the business will be starved of capital and continually be seeking funding for growth.
A business underpinned by high (and stable) gross margins is critical. This requires your business to have a select product range, normally focused on a specific niche and client / industry sector. This demonstrates the product or service you offer is of sufficient quality, and is delivered efficiently and profitably to your target market, all direct costs considered. This characteristic ensures that, so long as overheads are well managed, a strong proportion of revenue can flow though to your bottom-line., now and into the future- especially as you scale.
Track-record speaks volumes. Investors like investing in ‘horses that have been to the track’. Investors are rarely interested in 1 or 2 years of fleeting experience, complimented by an over-inflated forecast with less than realistic assumptions. They will normally pay a higher multiple for an established business with a strong track-record than they will a start-ups.
On this point, I have a question for you. How many homes globally do not have a Gillette razor-blade? How often do those home owners buy replacement blades. How often does Gillette need to re-invent it’s product. One of the greatest, yet least thought about companies on the planet.
So now, how scale-able is Gillette compared to the business of knee surgery, Pest control. Smash-repair
Simply: Staple = Scale-able.
There are 15 real estate agencies in the town I live in, and from the outside they all look the same to me. I can see very little difference in what it is that one does better, faster, cheaper than any other. So…
From a business perspective, how can I charge a premium for the product or service I offer?
From an investment perspective, why would I invest in one of these?
As a new owner, how tough will it be to scale one of these if I cannot see or present what it is that sets you apart?
Businesses with high levels of inventory on the shelves and high levels of capital tied up in equipment and heavy machinery can be harder to sell, and tricky to scale. As an investor, I am going to have to allocate a whole host of the funds I bring to this transaction to stock and gear instead of marketing and growth. If I want to expand or diversify, again the CAPEX to achieve this can to apprehensive. Astute Investors will prefer to see their contributed capital allocated to priorities that will see the business grow.
It can be lack of available cashflow that impedes growth or sees emerging companies fail. If I have to pay my wages, my rent, my suppliers, my interest and service my clients today, and yet not collect the moneys received for those efforts for over 30, 60, 90 days… then I may have a business model with less than ideal fundamentals. I pay my gym membership on the 3rd day of every month, whether I use it or not! Now that is great for cashflow and a characteristic for doing business that a progressive, growth-oriented investor will value highly!
Car yard, or Accounting firm, Jeweller or coffee-shop… which would you prefer? Warren Buffett is the largest global share-holder in Gillette and Coca-Cola! Why? Because he understand this fundamental.
If I have a product or service that clients buy from me once per year, as compared to 10, 20 or 100 times per year, then perhaps my ability to effect a scale or sales transaction may be less achievable.
Real estate businesses make more money from the recurring commission on tenancies they manage than properties they sale.
There is a lot less effort required to nurture existing clients that continue to buy, than having to continually go and find new clients to buy from me.
So how does your current business model score on this one?
Experts bet on ‘the jockey before the horse’. They will pay a premium for a business that can continue and grow after you (the prior owner) is no longer ‘at the reigns’. They will pay even a greater premium if- after purchasing- the current team can continue to run it without their direct and continuous input. On this, get to work to build a tam and culture that can run your business for and without you, and hurry! ;-)
Dentists can be hard to find. So can young architects to source and retain for the long-term in an emerging business team. By comparison, mechanics, electricians and pest controllers can be more readily sourced or created, so that leverage- and with it scale-ability and sale-ability- can be more attainable for a potential investor.
If you want to sell your business at a multiple. If you want to attract a cheque for goodwill, or a cheque at all for your business, then these factors are essential.
Corporate disciplines that work are the often overlooked characteristic. The army, schools and sporting teams are under-pinned by them. Culture and productivity hang from them, yet so few companies make these unique rituals a critical imperative for success. How well do you?
Would you buy a business that couldn’t? Enough said.
Strong projection for future earnings, obvious revenue upside through improving marketing, sales, service and value proposition
When we buy a car, we don’t pay for the mag wheels and the spoiler we will put on it after the transaction. We pay for it as it is.
That said, a business already tracking well without robust sales, service and marketing fundamentals can have genuine and relatively short-term upside if you can get to work on this post-purchase.
If you are selling a business, you want to be able to portal this upside as part of your pitch. Of course, your other option is to invest in these characteristics, and keep it! Either way, a strong projection makes any business more attractive.
Farming can be tough and unpredictable. So are car dealerships. I’d rather own and buy a business with risk factors I can contain and influence, businesses more boring , consistent and repeatable. Give me an accounting firm, plumbing business or PR / marketing agency any-day. External one-of-shocks don’t interest me.
In my opinion, and if you are building a business, your first 5 – 7 years should be focused intently on achieving this level of result. Once here, you become an attractive acquisition to a supplier, and competitor or a genuine new entrant to your sector. In this way, a business in this band-width attract valuation multiples with entertaining. Wouldn’t you?!
It’s tough to keep an eye on your children from inter-state, or influence your family from overseas.
In the same way, businesses and their teams need a leader. And if you are it, you are it.
I recommend you buy businesses within 2 hours drive (or flight) time from the place where you most want to live. If you are shaping your business for a successful sale, who is right in your back-yard, or willing to be? This may be exactly where your exit strategy hails from.
Finally, and maybe this one is more personal: My preference is to avoid the big, overhead heavy, mass-producing, slow-moving factories in favour of the more agile style of investment. In my view, out Asian neighbours can do a better job in this space than us, and that trend is only likely to continue. But hey, maybe that is just me (oh, and perhaps Warren Buffett…!) ;-)
Source: Refined for the Australian market following courses undertaken with Keith Cunningham, Austin, Texas
Sale or Scale Page siharris.com