Blog
Wednesday, July 18, 2018
What I Wish I Knew When I Started My Business
Since I’ve been a business broker and interviewed countless business owners, seen their options for exit and been a part of their exit planning, I’ve thought back on what I wish I had known when I started my small business in 2003. Here are three takeaways that I would have acted upon if i had the experiences and insight then that I have now…
The two ways to make money with a small business
You can make it along the way, or you can make it at the end. Businesses that are run to support a lifestyle are different than businesses that are run to sell for top dollar. As soon as business owners realize the tax repercussions of showing profit, they naturally mitigate their tax exposure. But when positioning to sell you actually want to show as much profit as possible. If I knew that I would run a business for fifteen years, I would run it as a lifestyle business for the first ten, then I would pivot to show as much profit as possible for the last five. 99% of buyers won’t look back farther than five years, and most only look back at three years to gauge the profitability of a business. This strategy enables you to make money along the way and at the end.
Understanding Accounting
When I started my small business I was more concerned about the day to day grind than the nuts and bolts of how my business was accounted for. I don’t think I fully understood how my books reflected my business until after I sold it. This is not uncommon for small business practitioners and operators, but it puts you at a disadvantage because the buyer’s perspective is all about how the money is made via the accounting perspective. If I had better understood the different “buckets” that my income and expenses were going into, I probably could have told a more convincing story financially as to the value of my business. Taking the extra time to understand basic accounting goes a long way in defending the value of a small business.
Solidifying the Value
So many times I interview small business owners and they are making good money but the cash flow isn’t formalized. Contracts aren’t put into place, common purchase items aren’t “packaged,” and vehicles for protecting the cash flow just aren’t put into action so that when the owner stops working, the earnings keep coming. Looking back at my own business, I packaged common products that we sold to create a “menu” so my customers could easily choose to buy what I wanted them too, but more could be done from a service and contractual perspective. This way, a future business owner could have seen that not only did my customers buy bite sized units of products that I steered them towards, but that there was a higher switching cost to go my my competitors, and that my products and services were “sticky”.
The Takeaway
The businesses that I’ve sold as a business broker have had people, processes, and profit that a buyer focused on and got excited about. The buyers saw something that had already been built, and they could “read” in the financials that it had worked consistently for a long period of time. And for those businesses that sold for top prices, the owners had taken the time to plan ahead, educate themselves, and invest in the future of their businesses. They had made a lot of money but they could also show that the business could continue to make more money.
Looking back I feel fortunate that I had any options for exit! I’ve come across more entrepreneurs whose options are limited to closing the doors and trying to negotiate out of their obligations. Whether it was a new system to make things more seamless, or updated equipment so that their business stayed ahead of the growth, the owners that solidified their success for the future are the ones that have more options for exit.
About the Author:
Neal Isaacs sells other people's businesses and blogs about building value in businesses. He's a Certified Business Intermediary (CBI), an Accredited Business Intermediary (ABI), a Board Member of the CVBBA & Better Business Bureau of Eastern NC. You can connect with him at @Neal_Isaacs, and his firm at @VRbizTriangle on Twitter or Facebook.
VR Business Brokers Has Sold More Businesses In The World Than Anyone ® and VR Business Brokers of the Triangle has deals dating back to the 80's right here in the NC Triangle market.
Neal Isaacs, MBA, CBI 7/18/2018 5:03:00 PM Comments (2)