I wanted to start this post off with a quick question: How many times have you heard someone refer to their business as “their baby”? Perhaps this is even something you do yourself.
Having supported many business owners on their exit journeys, I understand that a company is more than just the walls of a building, the people working for them or the products and services that power them. Businesses are built from countless hours of hard work, tons of sacrifices and an endless series of triumphs and set-backs. The emotions they inspire in their owners, workforces and customers are very real – particularly when the time comes to exit.
Of course, the strength of the emotions will depend on what people get out of their business. For some it’s a hobby. For others it’s a job. Some set out to change the world. Others want to secure their financial future. Many see their company as a reflection of themselves, or view it as a member of their family.
But, fundamentally, it’s important to view your company as an investment. And it’s important that you recognize it this way if you want to achieve an optimal return when you’re ready to exit…
The importance of your company as an investment
Unfortunately, far too many business owners in my experience don’t do the analysis that they need to view their company as an investment, and this can prove very problematic when they feel the time is right to sell.
Let’s say you look at your business as a job. This means you are likely looking at things from payroll to payroll and reacting to changes when necessary. As a result, you probably don’t have the time or inclination to consider strategy or plan for the long-term – which can prevent you from growing beyond this current dimension.
Alternatively, what if you view your business as a hobby? While it’s great to enjoy the work you do, if you don’t see it as any more than a getaway or pastime, you again probably won’t be paying too much attention to the future. You’ll be enjoying the here and now – something that can have negative consequences as the future draws closer and closer.
Finally, let’s consider someone who treats their business as an extension of themselves. They are probably more intently looking towards the future than the previous examples and making their business as strong and successful as possible. But they can’t imagine ever parting with their company one day.
They build their business around them. Everything goes through them, and the business could not function without them. But the fact remains that, one way or another, they will eventually part way with their company. And by making the organization wholly dependent on their presence, the owner has limited their chances of selling for the maximum value, as covered in this Generational Equity article on reducing owner dependency for business exits.
As so much of their time is tied into running and growing their business, they lose sight of the fact that they should be working towards getting a return for all the blood, sweat and tears they pour into this process.
When you buy shares on the stock market, your aim is to witness these grow in value and turn a profit on the other side, right? You should see your business in a similar way – you are guiding its growth in a bid to one day secure an offer that ensures your family’s long-term financial security and enables you to enjoy your next chapter.
Another essential reason you need to start seeing your business as an investment is because that is how buyers look at businesses, which is ultimately why business sellers should think like business buyers. A key factor in why M&A activity has picked up dramatically in the second half of 2020 following the initial shock surrounding COVID-19 is because buyers and investors always look at a company’s long-term future.
This is particularly true of private equity firms and family offices. They have persisted in making acquisitions because the length of times they intend to hold companies is very long. Most PE firms will hold an investment for 5-7 years before selling it on; family offices may intend to hold on to them forever.
Viewing your company as an investment is critical to getting inside the minds of business buyers. By keeping a close eye on your financials and how to positively influence these, by introducing growth strategies and tactics to minimize owner dependence, by having a clear strategy in place for the transition of ownership, you are removing the biggest obstacle in any buyer’s mind before making any investment – RISK.
How to achieve an investor’s mindset
So, now you understand why it’s essential to ditch the “my business is my baby” mentality for one that clarifies it as an investment (and one of the biggest investments you can make), what can you do to reinforce this in how you approach running your company?
Here are four pieces of advice I can offer to help you maintain this mentality and demonstrate to prospective buyers that you are treating your business as the investment they see it as…
1. Take steps to protect and grow the wealth in your business
Consider the following questions for a moment:
- What is the current value of my business?
- Are there any major risk factors in my company that I haven’t yet addressed?
- How does my business perform compared to our competitors?
- Am I satisfied with the current performance of my company?
- Is my business proceeding towards achieving my goals?
If you are unclear about the answers to these questions, it indicates that you could be doing more to defend and enhance the value of your company.
By addressing these areas, ideally with the help of professional strategic growth advisors, you will be taking strides to protect the wealth that you have accrued in your organization, and accelerating it to make your “investment” even more attractive to potential buyers and secure an optimal offer.
2. Focus on strengthening your management team
As noted earlier, thinking of your business as your baby or an extension of your own identity can be a slippery slope towards making it too dependent on you as the owner.
Not only does this put pressure on you to be everywhere in your company, but it waves a big red flag in front of prospective buyers – if the business’ success is largely due to your efforts, then they won’t be confident of it continuing to succeed when you depart.
Instead, focus on delegating responsibility to others in your management team, sharing responsibility and easing the burden on you. This will give buyers reassurance that your business will continue to thrive beyond your ownership, due to the performance of your team.
3. Foster your intangible assets
Imagine two companies – both working in the same industry, both based in the same city, both with comparable financials and growth projections. However, one is attracting premium offers, while the other is struggling to find a buyer. What is the reason?
The answer lies in their intangible assets, these are the elements that have a big bearing on company value, while not appearing on balance sheets. Part of treating your company as an investment is making sure these are evident to buyers, and how they set you apart from other targets in your industry.
Work closely with a professional M&A firm to determine exactly what intangible assets you hold, and what value they would offer particular buyers. From your systems and operations to your staff and intellectual property, having a strong grasp on these assets and how to make them stand out is essential to securing a premium offer.
4. Cement your exit strategy
Finally, ensure you have a documented exit strategy in place. This represents the goal of your investment, your roadmap for your transition to life after your business.
It is amazing how even to this day many business owners fail to fulfill this crucial step. Starting to plan your exit doesn’t mean you must exit right away. In fact, since the process is a journey, not an event, you are in no rush to close a deal.
A strategy is the difference between a business owner that HAS to sell, putting the power of the deal in the hands of the buyer, and a business owner that PLANs to sell, with a clear idea about what offer they need to provide for their future and how they intend on receiving it.
Getting help on your journey to exit
An important realization on your journey to a successful exit is that your business is, first and foremost, an investment. It may also be your passion, your job, your reason for getting out of bed in the morning – but above all else it is your vehicle towards total financial security, and you should never lose sight of that.
I hope this article has helped reinforce that point and introduced some food for thought on how you can always maintain this “investment-first” mentality.
To support you with this, I would highly recommend speaking to our folks at Generational Equity. Our experienced M&A associates are there at every step on your path to exit, from helping you create a comprehensive exit strategy and enhancing your business value, to guiding you through negotiations and managing emotions through this life-changing process.
Don’t just take my word for it, listen to what our clients say about the importance of exit planning:
- The Importance of Developing a Planned Exit Strategy
- The Importance of an Exit Strategy
- Selling Your Business – Choosing a Trusted Partner
If you’d like to know more, contact our M&A professionals today.