by Dave Driscoll
In September, we began a series identifying how to build a company that everyone wants to buy. To succeed at building a saleable business, you need to look at the business through the eyes of a prospective buyer.
What elements are most important to a buyer when weighing the risks to purchase your business?
- Cash flow
- Is what they see what they get?
- Are the financials believable?
- Is past performance indicative of future expectations?
- Business operations and corporate hygiene
We committed to providing three tips across three months to help you prepare your company for sale or transfer. Let’s recap:
Tip 1: Avoid owner-dependence to create the business that everyone wants to buy.
Can the business successfully function without you?
Tip 2: Logical and understandable financial reporting is essential.
What story do the financials tell? Is that story believable?
Our final tip in the series involves providing the buyer with a roadmap to successfully operate your business post-sale.
Tip 3: The Business Playbook – Human resource (HR) policies and operating procedures ensure consistency and success.
Is the workforce trained in expected behavior and job performance?
Written (and enforced) HR policies and operating procedures are very important to a buyer. Without a robust HR system and documented operational procedures in place, the risks are too high for both the seller and buyer.
Prospective buyers have more confidence in acquiring your company when their risk of ownership is reduced. If your employees know their jobs and have a written employee handbook that lays out policies, procedures and consequences, then:
- Employees know what to do and what is expected.
- Procedures promote accountability and performance consulting when necessary.
- Job vacancies can be filled more quickly when someone is out temporarily or leaves the company.
- Accusations of favoritism are eliminated.
- Processes are standardized, ensuring efficiency for the company and consistent results for customers.
Every new owner is vulnerable to employees who attempt to test the former’s mettle following a buyout. Remember how students challenged substitute teachers to see if the class could take advantage of the situation? The same concept applies here. But having a playbook provides the new owner with knowledge and reality checks for “that’s the way we have always done it.”
BUYER RISK: HIGH without good business hygiene
Buyers base their decision to acquire a business on historical performance with the expectation of continued success. A buyer is walking into a new situation, atmosphere and company culture, so they must be able to learn and understand the processes reliably to continue meeting customer expectations.
Without defined processes, the continuity and quality of production and service is also at risk of being interrupted if employees are unsure how to proceed with daily operations or troubleshoot. Employees who experience anxiety or fear about the new owner’s expectations will gain confidence knowing that the documented processes and procedures remain in place.
Create and follow a comprehensive employee handbook that documents everything from vacation and sick-leave policies to safety and procedure policies. Review the handbook every two years and update as needed.
Define job descriptions with detailed responsibilities and processes for each role and operation, including open/close procedures, operating procedures, etc.
Institute a highly structured management system using an appropriate software system in conjunction with leadership and employee accountability over all areas of the business.
I hope this series of articles helps you build a business that everyone wants to buy. My goal is for you to succeed in envisioning, planning and achieving your “Life Beyond Business.™”
Dave Driscoll is president of Metro Business Advisors, a business brokerage, valuation and exit planning firm helping owners of companies with revenue up to $20 million sell their most valuable asset. Reach Dave at DDriscoll@MetroBusinessAdvisors.com or 314-303-5600. For more information, visit www.MetroBusinessAdvisors.com.