Optimizing Your Business Exit- Part III

There are two ways to sell an old car: roadworthy, or for parts. The same is exactly true for the sale of a business. The “you plus” kind of business is much easier to sell as a going concern, the “just you” business is much more likely to get picked apart like a rotisserie chicken. But there are exceptions.

The “you plus” business is far more likely to be interesting to a buyer because they will, if it’s done right, end up with a machine capable of making enough profit to pay for itself, at least over time, and in most cases, something upon which they can build. The “just you” business not so much, but something whose output comes mostly from the sweat of the brow. Why would you pay a premium for somebody’s used treadmill?

The “you plus” business, if constructed right, stands independent of its owner. With good systems and great staff, your business continues to serve clients even if you take the day off, or even a month off. A buyer can step into your shoes as owner and reasonably expect the business to continue to chug along while they learn the nuances, and then hopefully take it to new heights. Unless they either miscalculate or screw up, they are buying a stream of income for which you can calculate a present value and therefore approximate a fair price.

Now, to be sure, a “just you” business sometimes has some breakup value. Sometimes pretty paltry, sometimes significant. A client list, or “book of business” can have significant value, and sometimes the place of business is in such an amazing location that anybody would want your business just to own your storefront. An ice water concession on a thirsty desert island is probably pretty desirable. There has to be some feature independent of “just you” to make your business attractive to a buyer other than by way of breakup value, at least to some extent.

But before we write off the “just you” business model as having little value, think again. The “just you” business can contain some very valuable components which can and should be monetized, either as part of a package, or in pieces. A rusty old Mercedes-Benz 770 may not be worth much as a parts car, but if it happens to be Hitler’s staff car, well, that’s a different proposition. In the same way, a “just you” business may have, over the years, developed attractive branding or systems or recipes which have great intrinsic value. Such businesses are often acquired solely to obtain these things.

It’s quickly apparent that it’s not so much the “just you” business itself which is attractive to the buyer, because after all he can just get his own treadmill. What is attractive to the buyer is the secret sauce, the thing which will continue to have value long after you’re out of the picture. Occasionally the secret sauce is something like location or a privileged relationship, as discussed above, but mostly it’s a method or a system or a recipe which you’ve created or developed. Colonel Sanders’ KFC is an historic example.

Even the “component” discussion has two prongs. Some things have stand alone value, provided the buyer isn’t stupid with them after purchase. Other things, such as client lists and books of business, will need the buyer to continue to feed and water them. Buying a list of clients, only to treat them rudely and without the care to which they’ve been accustomed, is throwing away money. On the other hand, buying the formula for turning lead into gold has high intrinsic value which requires active stupidity to devalue.

In either case, the important trick for the business owner is to protect and enhance the value of these “component” assets, some of which is done by formal Intellectual Property protection (such as patents, trademarks, and copyright), some of which is done by non-disclosure agreements with employees and others, some of which is done by just keeping such things close to the vest. We’ll deal with these in an upcoming edition.