How To Increase the Value of Your Business Before
You Sell... and Make it More Profitable Now!
Lorraine McGregor
Also By Lorraine McGregor
Fast-Track Secrets for Making Your Business Saleable, book and playbook, co-authored with Rob McGregor
Business owners who are committed to making their businesses saleable will benefit from this comprehensive textbook that provides an understanding of the way buyers view their businesses. In addition to supplying this vital perspective, the McGregors offer their proven, four-step system to help owners learn how to attract a premium offer.
The playbook includes exercises that build an owner’s Saleability Blueprint. Once the book and playbook are complete, business owners will know what to change inside their businesses to make them saleable, and they will have the blueprint upon which they can create a detailed action plan.
Make Your Business Saleable Resource System
This extensive resource system includes everything business owners need to make their businesses saleable:
• Fast-Track Secrets for Making Your Business Saleable, book and playbook.
• How to Increase the Value of Your Business Before You Sell... and Make it More Profitable Now!
• Three videos on how to make three critical decisions.
• DVD series of nineteen video interviews that provide business owners and their advisors with the knowledge they need on the journey to becoming saleable.
For Rob Roy McGregor
who helps me find the words for
what I really mean to say.
WHAT BUSINESS OWNERS ARE SAYING
“Having owned several businesses over the years, I always wondered why I couldn’t get more out of them while I owned them or when I sold them. After reading this amazing book, I now know. The value was always there; I just didn’t know how to maximize it. Thanks to the McGregors, now I do. Finally, the definitive answer to the question I always ask about my businesses, “How can I take them to the next level?” If, like me, you want more, then devour this material. It’ll change your future!”
James Richardson, President, J2 nvestments
“In the midst of the daily battle that comes with owning and operating a business, creating the best and necessary preparation for the owner’s inevitable exit may seem like a luxury or may be the last thing on the owner’s mind... until it’s too late. Lorraine Rieger McGregor has gifted business owners everywhere with a simple, yet thought provoking path to the fulfillment of their highest exit strategy hopes in this book.”
David Frank McSpadden, CEO, RethinkAge Institute, LLC, former President and CEO, McSpadden Development Corporation, and author of Gonna Jump?... Take a Parachute
“Often when you read a “how-to” book, you are cognizant there is so much more the author is intending to communicate, yet the “how-to” steps are not provided. You feel like you’ve been handed a full-color, glossy photo of a gorgeous home and told you are expected to go build it from the photo alone. This is not the case with this text. Being a past client of Rob and Lorraine McGregor I felt like I had special insight into their written words as I read their book. The concepts, neatly written in sentences throughout the book, meant so much more to me since I had the immense privilege of being taught and coached by the authors the very nitty-gritty behavioral adjustments required to achieve their book’s written concepts. The coaching put the “meat on the bones” so to speak. After reading their published book, I could now appreciate the big picture of what it takes to have a successful business defined by my values, needs, and desires. I was also intrigued to realize the coaching track I was on would help me to not only make my business as profitable as it can be, it would also be the same steps I would need to take to maximize my return if or when I decide to sell my business one day. This book is a must-read, and their coaching far exceeds any professional track I have ever been on. Warning! Only read the book if you desire to rise to your given potential!”
C. Esther De Wolde, CEO, Phantom Mfg., Int’l Ltd.
WHAT THE EXPERTS ARE SAYING
“Every private client advisor (or wealth advisor or relationship manager) should provide their clients who own businesses a copy of this extraordinary book... This book is a fantastic breakthrough resource for preparing to sell your business at maximum value. If your client owns a business, they need to have this book. They will thank you endlessly and never move their wealth to another advisor.”
Thomas R. Sweet, Former VP Consumer Marketing, City National Bank, Beverly Hills, CA and Former VP Marketing, Nevada State Bank
“Insightful! What a great roadmap for maximizing the sale of a business. As a business lawyer, I often see overwhelming challenges for business owners who do not prepare for the sale in advance. An ounce of prevention is worth a pound of cure, and there is a ton of information in this book that will help sellers quickly turn their businesses into ones that are saleable. I plan on recommending this book to every client who is thinking about selling a business or even just starting a business and wants to build it right from the start. Not only will it make business owners smarter about selling a business, it will make them smarter about running a business!”
Roger P. Glovsky, Esq. Venture Attorney, Indigo Venture Law Offices and founder of the Seminar, “How to Save Thousands of Dollars on Legal and Professional Fees by Preparing in Advance for the Sale of a Business”
ABOUT THE AUTHOR
Lorraine McGregor is the co-author with her husband and business partner, Rob McGregor, of Fast-Track Secrets for Making Your Business Saleable, the first step-by-step manual and workbook on how to make a company worth the value for which the owner wants to sell it. As management consultants, the McGregors coined the term “saleable” and have proven with their own clients that a saleable business is a more profitable business.
Since 1990, Lorraine has helped more than one hundred business owners in a wide variety of industries grow to the next level. She brings clarity to the difficult decisions about where to invest in people, resources, and actions in order to get the desired results.
Lorraine is also the past president of the Vancouver Chapter of the Association for Corporate Growth, the leading mergers and acquisitions association for “Dealmakers,” the people who manage the transactions of buying and selling companies. She holds a Masters in Business Administration from Simon Fraser University.
She regularly speaks to the influencers of business owners: their wealth managers, private bankers, accountants, lawyers, and financial planners across North America to help them understand the challenges a business owner faces in making the exit decision.
Lorraine and Rob enjoy sailing their Catalina 34 through the magnificent waters of the islands off the British Columbia and Washington coasts.
DISCLAIMER
The information contained in this document is subject to change without notice, and it represents the current view of the author.
Compliance with all applicable copyright laws is the responsibility of the user. Without limiting the rights under copyright, you may not reproduce any part of this document, store or introduce any content contained herein into a retrieval system, transmit in any form or by any means (electronic, mechanical, photocopying, recording or otherwise), or for any purpose without the express written permission of the author(s).The information contained in this document is proprietary and the exclusive property of the author, except as otherwise indicated.
The information in this document provides content for discussion and general informational purposes only. The author MAKES NO REPRESENTATIONS, WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, REGARDING THE INFORMATION IN THIS DOCUMENT. Nothing in this document constitutes investment, accounting, tax or legal advice. The reader is solely responsible for any use or application of the information or results achieved from the content. The author advises you to seek appropriate investment, accounting, tax, legal, and other professional advice in accordance with your applicable jurisdictions prior to acting or relying on any of the strategies in this book.
The case studies included in this book are based on our client files. Names, numbers, strategies, and defining features have been changed, and some of the characters are composites of several people.
All of the achieved results are factual.
How To Increase
the Value of Your
Business Before
You Sell... and
Make it More
Profitable Now!
All rights reserved. No part of this book shall be reproduced or transmitted in any form or by any means, electronic, mechanical, magnetic, photographic including photocopying, recording, or by any information storage and retrieval system without prior written permission of the publisher. No patent liability is assumed with respect to the use of the information contained herein. Although every precaution has been taken in the preparation of this book, the publisher and author assume no responsibility for errors or omissions. Neither is any liability assumed for damages resulting from the use of the information contained herein.
Copyright 2012 by Lorraine McGregor
ISBN: 978-1-61863-621-8
Printed in the United States of America First Edition Published May 2012 Third Edition Published January 2014
Bookstand Publishing 4001_5
SPIRIT WEST MANAGEMENT, LTD.
718-333 Brooksbank Avenue, Suite 327 North Vancouver, BC Canada V7J 3V8 To Order: www.SpiritWest.com/Products info@SpiritWest.com
TABLE OF CONTENTS
INTRODUCTION
CHAPTER 1
WHAT GOT YOU STARTED? IS IT STILL THERE?
CHAPTER 2
WHAT IT MEANS TO HAVE A SALEABLE COMPANY1
CRACKING THE DEALMAKERS’ CODE
THE FOUR-STEP FRAMEWORK TO BECOME
SALEABLE
GET TO KNOW YOUR DESIRED END RESULT
BECOME WHAT YOUR IDEAL BUYER NEEDS
FIND WHAT MAKES YOUR BUSINESS SALEABLE AND
UN-SALEABLE
SO IS THIS SALEABILITY EFFORT WORTH IT?
HOW TO GET STARTED
INTRODUCTION
Many business owners expect to fund their retirement based on the proceeds from the sales of their companies. The ongoing study by Vianello Forensic Consulting,1 “Marketing Period of Private Sales Transactions,” and The American College’s State Farm Center for Women and Financial Services2 both warn against relying on this expectation.
The statistics tell an even more desperate story. Ninety percent of business owners who attempt to sell either fail to find a buyer or, if they do find a willing buyer, then they are unable to close the deal.
Why do so many successful business owners struggle to find buyers? Why do dreams of selling businesses to fund retirement die on boardroom tables?
1. Successful But Un-Saleable: Owners are not aware that the typical business, despite being successful for the current owner, is not saleable and, therefore, is not transferrable to a new owner.
2. No Time to Prepare for Successful Exit: Owners are not aware that they have to make the company saleable. And so, they are also not aware that it can
1 Private Firms Linger Longer on the Selling Block, Business Valuation Update Issue #132-1 September 11, 2013
2 Financial Goals, Concerns, and Actions of Women Business Owners – Focus Retirement Planning February 24, 2012 http://womenscenter. theamericancollege.edu/ uploads/documents/Women-Business-Owners-Retirement-Study-022412-v2.pdf
take two to four years to make the changes inside the business that make the company transferrable and saleable.
3. Circumstances Dictate Exit Dates: Owners tend to put off the idea of exiting until an external event forces them into looking for a buyer. They then find out, at the worst time, that the company is not saleable. There is now no time available to change the situation.
4. No Thought of Return on Investment: Owners tend not to view their businesses as assets that have to be managed in order to get returns on all that they have invested.
5. Advisors are Not Aware: Advisors generally don’t know that their clients’ businesses are not saleable and that there is an actual process to make them saleable. As a result, advisors are not prepared to help a business owner client come to terms with this challenging situation, set an exit date, and make the changes in the business that it needs to become saleable.
Since 1990, my company, Spirit West Management, has helped business owners grow to the next level. During that time, naturally, some clients started to wonder how to spend less time in the business and even how to sell it.
Since 2000, Rob, my partner and husband, and I have worked directly with buyers to understand how they search for acquisitions and what makes them say yes to one out of every one hundred companies they look at.
To help our clients, we took our research on buyers and developed it into a four-step system that shows how to make a business saleable.
Then, a surprising result surfaced. When our clients followed this system, they all received an immediate side benefit: Their companies became more profitable and easier to run.
Most importantly, our clients attracted buyers willing to pay premiums for the rights to acquire their businesses. In fact, some clients doubled the value of their companies within two years of applying our strategies.
Our mission is to share this system that shows how to get similar results with all business owners who want the certainty that they will be able to sell their companies. This outcome is far more preferable than what 90% of those who have tried to sell and failed have experienced – watching their lifework wither away as time goes on and the company does not attract a buyer.
To that end, in this book, we offer business owners and their advisors an introduction to making a business saleable. Your time spent learning the concepts will prepare you to decide whether this direction is the right path to choose.
The concept of becoming saleable is not difficult on the surface, but it is a significant mindset shift. In the following chapters, you will learn how to see your business as buyers do.
Once you have completed this book and decide that setting an exit date is far more important than you first thought, then you will be ready to take on the challenge of making your business saleable.
After you have made this first decision to reposition your company, you will then want to dig into learning how to do it. The Make Your Business Saleable Resource System is a self-guided program that takes you through each of the four steps in deep detail. It includes a playbook of questions that will help you build your customized Saleability Blueprint, which is the plan that reveals what you should change in your business in order to make it saleable.
As you learn more, you also have the guidance of nineteen experts who, through video interviews, provide wisdom and advice on everything, such as what it’s like to try to sell a business, how buyers see your company, how and why a bank would finance a management buyout, and how to prepare for sudden wealth. You will also learn how to lead yourself through the change. Yes, change will be your new ally in making your business saleable.
Should you, like many of our clients, decide you want guidance through this journey, our firm offers group mentoring programs. You will join 8-10 other business owners in non-competitive industries and work together with trained facilitators to make your own business saleable. Call us at 206-395-3540 to see if we have a mentoring program in a location convenient to you.
What does it mean to have a Saleable Business? Your company is transferrable, consistently profitable, and ready to or already growing. As a result, you will be able to do any of the following:
1. Get financing for an employee to buy you out.
2. Get financing to help a family member buy you out.
3. Get financing at an agreed upon valuation so you can buy out a business partner.
4. Attract a strategic or private equity buyer.
5. Sell to another entrepreneur.
6. Take on a new business partner who will buy out your shares over time.
7. Sell a minority or majority stake in your business while retaining some equity to retain a portion of the upside as the company grows under its new owners.
8. Find and hire a general manager who will run the business for you and grow it to the next level until it’s ready to sell for your asking price.
What you are about to learn is that there is far more involved in making a company saleable than setting an exit date and hiring a successor. To be ready to sell involves the need to: shift your mindset; deal with emotional and psychological barriers and difficult choices; be willing to change how you lead and how you run your business; and put in place the critical success factors that tell buyers your company is their ideal acquisition.
Let’s begin at the beginning in order to clearly see what it means to make your business saleable.
CHAPTER 1
WHAT GOT YOU STARTED? IS IT STILL THERE?
In this chapter, you will learn:
• What motivates you.
• Why that motivation is key to making your business saleable.
• How business owners determine when to exit.
• Why choosing an exit date is preferable to being forced to exit due to unforeseen circumstances.
I want you to think back for a minute to the time when you started your business, practice, or service. What was your intention in starting your company? Do you remember your passion and excitement for what the future would hold?
Then, as you built your business, what drove you to put in the hours you did, to come up with the solutions to solve the problems, to deal with all the sticky situations and people problems, the rollercoaster economy, and the burden of carrying payroll? What was your big dream? Is it still there, beating a steady drum for you?
You need to be rewarded for all that ingenuity, all those sleepless nights, and all those ridiculous rock-and-a-hard place decisions you’ve had to make. I know how to help you obtain that reward.
Imagine yourself receiving the biggest check you’ve ever seen, the return on investment (that’s the big reward!) for all that you have built.
All you have to do to get that check is to run your business like an asset that must provide a return on any effort invested. That return is for you, your partners, and your stakeholders. That return is also for the next owner. This is what this book is all about.
In the following chapters, I will reveal to you the secrets that are normally locked away in the minds and playbooks of buyers. I will expose you to the problems that you may not know about that are facing boomer business owners around the world. Their lack of awareness about these barriers is undermining their current and future wealth. Happily, because you are getting this intel early on in your run up to your big exit date, you will be far ahead of the pack.
I am unveiling the entire blueprint right here. These are the milestones that cause your business to become a saleable company. This is the same four-step saleability system that I use with my clients to help them position their companies to be both saleable and more profitable.
Figure 1 – The Steps to Build a Saleability Blueprint
For every client we work with, we follow the four-step system to help them discover the secret sauce that makes their businesses more profitable, easier to run, and positioned so that the owners can sell them when they want for what they want. The four steps are: 1) Handle Reality; 2) Hone Goals and Decisions; 3) Hunt the Right Acquirer; and 4) Helm the Transition. We will go into each of these four steps in detail in the next few chapters.
You are about to learn how to look at your company in the same way that buyers do. You will understand the red flags that buyers consider, such as profitability leaks (how your company makes and loses money), as well the green light opportunities (for which buyers pay a premium). As a result, you can maximize the return that you will get on the biggest asset you own.
However, before we take you on that journey, you have to know why you would want to go.
What got your company started isn’t what keeps you going today. Some owners are locked into their daily routines and obligations. They do not spend their time thinking about and seeing the potential of their futures. When you don’t think about what you want, you only get more of what you already have.
What would drive you to exit your business? It’s your baby after all. What will motivate you to get off the day-to-day treadmill and really set yourself up for that big payday?
Below are some of the reasons why our clients have chosen to make their companies saleable. Perhaps some of these reasons might be true for you, as well.
1. Finish the Game: They have accomplished a lot in their business lives. Selling the business will be like finishing the race, getting the gold, winning the lottery, and especially, as one client said, “It’s the right way to end the story for me and continue the adventure for my employees and customers.”
2. Get the Reward: The idea of being given millions for something they created themselves is deeply satisfying and very tantalizing. “It’s hard to believe we started this company on two credit cards and a bold call to a big customer, and now if we sold the business we would be millionaires!”
3. Sell Before the “Best Before” Date: Business partners have watched one another age and have seen their enthusiasm and ability wane over the years. Selling is a way to reinvent themselves before time catches up with them. “I’ve watched my partner lose his joy for what we do. I hate seeing how stressed he gets about things that never would have fazed him before. I don’t want to end up in the same boat.”
4. Financial Certainty: Business life has been a series of ups and downs. All that uncertainty has been a thrill ride but a little tiresome. There is a huge desire to feel certain that there will be money in the bank to take care of family needs, wants, and freedom. “There is more to life than running this company. I want the financial freedom to contribute in a new way. I need to refresh my life.”
5. Win the Race: Sometimes, it’s the chance to trump competitors that drives an owner to sell, especially if the industry is consolidating. Being selected as the key acquisition over other companies is their way of winning the race once and for all. “I’ve been watching our competitors shrink and swell for years. I’m not shrinking next time there is a downturn. I’m going to get my exit now.”
6. Pass the Torch: As an owner ages and they see the energy and excitement of younger employees, they know that at some point they will lose the spark, the will, and the drive to push the business further. They’ve chosen to plan for that day in advance so the company doesn’t decline under their watch. “I think we have a lot of bright, eager people here who could lead this business to new heights, and I want to see them put their strengths to work in this company, not leave because I’m not driving the business the way it could be.”
7. Adapt or Die: As industries change, companies must adapt or risk being pushed out. The right time to sell is before seismic shifts occur in the marketplace. Smaller companies often don’t have the resources to ride out the changes. “At the size we are, we can’t get the economy of scale we need to reduce costs, so we have to grow and adapt, which takes investment. We’ve got the know-how; now we need the buyer with deep pockets.”
8. Spouse Says It’s Time to Stop: Often the wife or husband can see changes in the business owner that signify that enough is enough. There are other activities and desires yet to be explored, and the spouse sees that these opportunities will continue to wilt away the longer the owner stays enmeshed in the company. “My wife and I only see each other when we are on vacation. I see my friends doing some fascinating work on boards or mentoring entrepreneurs or doing projects to help people. Maybe she’s right. It’s time to find out what else I can do that is satisfying.”
Which one of these reasons for planning an exit date rings a bell for you? Take a moment to write your reason down on a Post-it note. If you don’t find a resonator among these reasons for exiting, then write down a list of the possible alternatives that might urge you to seek a buyer.
What is the most powerful motivator behind the reason you selected? Write that down, too, and then put this Post-it note on your computer screen.
Let’s continue.
Now, here’s a list of reasons – according to business brokers, bankers, lenders, and mergers and acquisitions advisors – that motivate business owners to seek out a buyer:
1. Divorce: The judge has ordered the sale of the business, or the financial expectation is to divide the wealth of the business. The owner has no choice but to sell in order to come up with the cash to divide the assets.
2. Health: The owner has found that the stress of running the company is a factor in the deterioration of his or her health, and since there is no one who can take over, the owner must try to sell it.
3. Death: The owner has passed away, leaving the business to the spouse. The spouse is often in the dark as to how the business operates and can only rely on staff to step in and manage the business. If this doesn’t work because the owner did not prepare the staff to run the business, the only option left is to try to sell it. Imagine how hard this will be on the surviving spouse.
4. Too Tired: One morning, the owner just wakes up and decides he or she has had enough and doesn’t want to run the business anymore. Owners in this situation have lost the “juice” and the passion to continue to deal with the day-to-day crises.
5. Partnership Ending: The owners are fed up with one another and have not been able to reconcile their differences with respect to how the company should operate or be led. One or more want out of the business, so attempting to sell it is their solution.
6. Industry Slow Down: Business has been slow lately, profits are inconsistent, and competition has moved in. The owner wants out before things get any worse.
7. Kicking the Tires: The owner hears that another business owner has just sold their company for a handsome price. On learning about the deal, the owner starts to compare his or her business to the one that just sold and sees a lot of favorable similarities. They turn to a broker to see if they could get a similar deal.