Adding Value to Small Business
Adding Value to Small Businesses: What Else Counts Besides Profits?
How can a seller add value to the business he/she is selling? How can a business broker add value to a listed business for sale?
The obvious answers would be for each to do something that increases profits, since most of us recognize that a business’ value is based upon some multiple of its net profits. But what else counts besides profits? What are the other changes that can be made to add value to a small business for sale?
Watch the Franchises
Sellers and brokers need to understand what buyers want. Obviously, buyers want to know what a business owns and what it earns. But, beyond that, they want to know what makes it special.
We can learn valuable lessons from the way franchises market themselves. They have beautiful front-end brochures telling the franchise story. They offer a complete set of operations and systems manuals to franchisees. They feature in-depth training for one or two weeks and long-term support through association with other franchisees. They usually offer a way into the business with a small down payment and financing.
Sellers and brokers can add value to their businesses for sale by focusing their efforts to market their independent businesses more like franchisors market new franchises.
Tell the Story
Buyers want a business with a market position or niche that they understand. Buyers want a business that offers a predictable foundation for future profits. Sellers and brokers need to tell the business story so that it is clear why buying the business makes sense.
Sellers can provide a narrative description of where their business fits within its industry so the future opportunities will be easier for buyers to understand. Sellers need to explain what is unique about their particular business. They need to explain what franchisors call the business’ ‘growth potential.’
When listing a business for sale, business brokers usually perform their own ‘due diligence’ investigation into the background details of the listed business and prepare some sort of offering summary.
The broker’s offering summary is where the business’ story should be told. It should detail the history of the business, its current strengths and weaknesses and how it is managed. It should describe the assets that are for sale, explain why the seller is selling and what kind of transaction is offered to potential buyers. Even weaknesses should be discussed because this is often where the buyer’s best growth opportunities are to be found.
Documenting a business’ story and marketing position in this way serves two other purposes. It helps focus both seller and broker on who ought to buy the business by clarifying and unifying their thinking on this subject. It also helps them to more fully understand what they are selling and gives them valuable practice in telling the business story to prospective buyers.
Explain How It Works
Buyers want to see a working system in operation. Unlike entrepreneurs who enjoy the challenge of starting a business from scratch, business buyers are more likely to appreciate in-place operations and procedures.
We once sold a consulting business with a $100 desk and an old $500 computer for over $125,000 because it had a well-organized operations manual! The buyer understood that he could make his desired income by following the system the seller had created. This is precisely what franchises offer to buyer prospects!
It may seem odd to sellers to think that they might need to write a business plan or an operations or systems manual to “add value” to their business after managing all these years without one! But business buyers frequently come from big business where plans and manuals are common.
In the process of meeting with prospective buyers, brokers need to help them to understand the small independent business and how it operates. They need to offer buyers frank discussion about the strengths and weaknesses of various types of business opportunities.
If a seller has, or can develop, a set of plans and manuals, then the business’ offering summary should point out what a significant contribution this will be to the future operation by a new owner.
If a seller doesn’t have a set of such plans and/or manuals, then this is a weakness. But, like all weaknesses of any business, this weakness can be viewed by some buyers as an advantage – a great opportunity to make the business grow by adding that level of sophistication.
Prepare to Teach & Train
Buyers want a training package and some direction to help them learn the business. Knowledge given to them about industry trade shows, trade publications and trade associations usually gives them the comfort that they are not without external resources as they prepare to learn the details of the business.
Sellers need to join the trade associations that are appropriate to their business. They need to gather information about trade publications, ‘how-to’ books in their field, trade shows, conventions and seminars. Buyers will want to know about this information.
If a seller can’t or won’t perform this research, brokers can sometimes fill the gap by gathering the relevant industry information themselves. This is especially needed for businesses that are likely to be purchased by first-time buyers who are not familiar with the territory.
Lower the Down Payment
Buyers want financial assistance that helps them buy the business with the lowest possible down payment. This lesson is as old as sales itself! High down payments discourage buyers.
The number of individual buyers who have more than $150,000 available for a down payment is small. Sellers who can tap into the market of buyers who have less than $150,000 can greatly increase their odds of selling.
Most franchises have initial investment requirements well below $150,000. They know where the action is and they take aim at that market. Franchises are direct competitors of independent business sellers. Sellers and brokers both need to realize this and structure the promotion and sale of the independent business to meet the franchise competition.
Clean Up the Office
Finally, the seller’s office should be made ready for the buyer to move into emotionally. If a seller hasn’t taken time to create a clean, neat, comfortable, efficient office before now, this is the time.
Buyers are likely to picture themselves sitting in the seller’s chair. How does it look? Does it help give the impression that the seller owns a valuable business?
A franchise always paints the picture of the professionally designed franchise store with effective and efficient office systems already in place. Independent businesses can frequently offer a more appealing dockside office, a renovated historical building office or even a home office.
Buyers must be able to picture themselves sitting in the seller’s chair, writing the next profitable chapter of the business history and using the systems the seller has put in place to build a bright future.
Consistent profitability. Well trained staff and a variety of e-commerce clients.
The cyclical nature of the economy can add uncertainty to the timing of an acquisition, or an exit from a business. However, unlike the clarity of an improving economy or the risks inherent in a downturn, buying or selling at a market high creates a unique set of challenges.