Why Do It?
Why do we do anything? Mostly, we do something if it makes us feel good.
Good and happy are not the same things. Sometimes we are not happy about doing something that eventually will make us feel good. Generally feeling good has something to do with values. This comes from the axiomatic observation that if one exercises personal choice in taking action in harmony with core values, one will likely experience a sense of self-fulfillment and personal well-being – that is to say, feel good.
Why own a business? Often it happens from something that can be done for money. When people pay you money for something you can do, you feel good. There may be other things that make you feel good about a business (helping your customers and giving your employees jobs), but right down at the base of it you are in business to make money. Generally, the more money you make, the better you feel. Most of the time, core values do not get in the way of that.
So even though the owners of a business will have one overriding goal – even considering lifestyle and independence concerns – to make the most money they can from the business they own, many owners fail to accomplish that goal because they fail to fully develop the business to receive maximum value from the business when they leave the business.
Owners make money from a business in two ways. First, they make a profit from the operation of the business. Second, in the event of the sale of the business, they receive value (the net sale proceeds) for the business. To make the most money from a business, the owners' strategy must include the goals of highest possible profitability and receipt of maximum value as a result of any sale of the business. Many owners forget that an involuntary transfer of the business, which can occur upon an owner's disability or death, could happen at any time. Moreover, in a given time frame, more money can be derived from selling a business than operating it.
A savvy business owner will derive maximum value from the business by developing the business to be attractive to buyers at the highest possible price. Selling a business for maximum value is an established wealth-building transaction. Yet, most business owners have businesses that do not attract buyers and will not sell at maximum value. What can a business owner do to attract buyers willing to pay maximum value for a business?
Generally, a reasonably intelligent buyer will pay a price based on the contemplated return on the buyer's investment. The value derived by the seller (the price level) will be directly related to the profitability of the business and the phase or stage of the purchased business in the normal private business cycle.
The normal business cycle has three stages. The first stage is the start-up, where the owner-founder produces and manages the business. The second stage is where the owner-founder becomes an owner-manager, ceases production activities for the business, and manages the business. This second stage is usually characterized by the consistent making of profit. The third stage is where the owner hires others to manage the business.
A third stage business will derive a greater value to the seller than will a business in the first or second stages. If the seller is an owner-manager and integral to a business in the second stage, the seller must either remain after the sale as a highly paid employee or be replaced by a highly paid employee thereby reducing the return on the investment to buy the business. If the business is in the first stage, the problems on realizing a return on the purchase investment compound: the business is new and may not be consistently making a profit and the role of the owner-producer will probably have to be assumed by the new owner.
Most business owner-founders have the strategy to get to stage two by making a profit as soon as possible but then maintain that status. For a variety of reasons, many businesses stay in the second stage and the owner remains a manager of the business. To maximize the value derived from a business, the business should become a third stage business (with the owner not managing the business) as quickly as possible so that the opportunity of a sale for maximum value is available.
Business Transition Consulting enables second-stage businesses to transition to third-stage businesses and make their owners feel good.