Run Your Private Company Like It’s Public

Small businesses often operate as if their sole purpose is to fund the owner’s lifestyle, but the most valuable companies are run with financial rigor. You may be years from wanting to sell, but starting to formalize your operations now will help you predict the future of your business. Then, when it does come time to sell, you’ll fetch more for what you’ve built because acquirers pay the most for companies when they are less risky. There’s nothing that gives a buyer more confidence than clean books and proper record keeping. 

Jay Steinfeld is a great example of how to run a business like a public company. Steinfeld studied Accounting at the University of Texas and joined KPMG after college. His wife owned a small retail store selling blinds and window treatments. The store was successful, but by 1994, Steinfeld had noticed a little Seattle-based outfit that was trying to hawk books online.  This company with the peculiar name “Amazon.com” started to succeed in selling books online and Steinfeld wondered if he could get consumers to buy blinds online.

Soon after, Blinds.com was born.

Unlike many of the first-generation online companies that were run with little financial controls, Steinfeld grew Blinds.com like an accountant. He was determined to run his business with the same rigor as a publicly listed company. He built an experienced management team and took the unusual step of assembling an outside board of directors even though Blinds.com was private and Steinfeld owned all of the stock.

The board met quarterly and each of Steinfeld’s senior managers were asked to prepare and deliver formal presentations to his board. Steinfeld hired a big four firm to complete a full audit of his financials each year even though all he needed to satisfy Uncle Sam was a simple tax return.

By 2014, Blinds.com had grown to 175 employees and, at more than $100 million in revenue, was the largest online retailer of blinds in America. Even though Home Depot had close to $90 billion in sales at the time, Blinds.com was outperforming them in its tiny niche, which – coupled with their fastidious bookkeeping -- made Blinds.com absolutely irresistible to Home Depot. On January 23, 2014, Home Depot announced its acquisition of Blinds.com.

Running your business like it’s public will make it more predictable as you grow and ultimately a whole lot more attractive when it comes time to sell.

Register today for our ExitReadiness® BASECAMP and run your company like it’s public.

4 Steps To Finding Your Sell-By-Date

Most business owners think selling their business is a sprint, but the reality is it takes a long time to sell a company. 

The sound of the gun sends blood flowing as you leap forward out of the blocks. Within five seconds you’re at top speed and within a dozen your eye is searching for the next hand. Then you feel the baton become weightless in your grasp and your brain tells you the pain is over. You start an easy jog and you smile, knowing that you did your best and that now the heavy lifting is on someone else’s shoulders.

That’s probably how most people think of starting and selling a business: as something akin to a 4 x 100-meter relay race. You start from scratch, build something valuable, measuring time in months instead of years, and sprint into the waiting arms of Google (or Apple or Facebook) as they obligingly acquire your business for millions. They hand over the check and you ride off into the sunset. After all, that’s how it worked for the guys who started Nest and WhatsApp – right?

But unfortunately, the process of selling your business looks more like an exhausting 100-mile ultra-marathon than a 100-meter sprint. It takes years and a lot of planning to make a clean break from your company – which means it pays to start planning sooner rather than later.

Here’s how to backdate your exit:

Step 1: Pick your eject date

The first step is to figure out when you want to be completely out of your business. This is the day you walk out of the building and never come back. Maybe you have a dream to sail around the world with your kids while they’re young. Perhaps you want to start an orphanage in Bolivia or a vineyard in Tuscany.

Whatever your goal, the first step is writing down when you want out and jotting some notes as to why that date is important to you, what you will do after you sell, with whom, and why.

Step 2: Estimate the length of your earn out

When you sell your business, chances are good that you will get paid in two or more stages. You’ll get the first check when the deal closes and the second at some point in the future -- if you hit certain goals set by the buyer. The length of your so-called earn out will depend on the kind of business you’re in.

 

The average earn out these days is three years. If you’re in a professional services business, your earn out could be as long as five years. If you’re in a manufacturing or technology business, you might get away with a one-year transition period.

Estimate: + 1-5 years

Step 3: Calculate the length of the sale process

The next step is to figure out how long it will take you to negotiate the sale of your company. This process involves hiring an intermediary (a mergers and acquisitions professional, investment banker or business broker), putting together a marketing package for your business, shopping it to potential acquirers, hosting management meetings, negotiating letters of intent, and then going through a 60 to 90-day due diligence period. From the day you hire an intermediary to the day the wire transfer hits your account, the entire process usually takes six to 12 months. To be safe, budget one year.

Estimate: + 1 year

Step 4: Create your strategy-stable operating window

Next you need to budget some time to operate your business without making any major strategic changes. An acquirer is going to want to see how your business has been performing under its current strategy so they can accurately predict how it will perform under their ownership. Ideally, you can give them three years of operating results during which you didn’t make any major changes to your business model.

If you have been running your business over the last three years without making any strategic shifts, you won’t need to budget any time here. On the other hand, if you plan on making some major strategic changes to prepare your business for sale, add three years from the time you make the changes.

Estimate: + 3 years

Figuring out when to sell

The final step is to figure out when you need to start the process. Let’s say you want to be in Tuscany by age 50. You budget for a three-year earn out, which means you need to close the deal by age 47. Subtract one year from that date to account for the length of time it takes to negotiate a deal, so now you need to hire your intermediary by age 46. Then let’s say you’re still tweaking your business model – experimenting with different target markets, channels and models. In this case, you need to lock in on one strategy by age 43 so that an acquirer can look at three years of operating results.

Use Code ACADEMY-15 and get 15% off our Online Exit Planning Course.

Register today for our Exit Planning Workshop.

Expensive Sentences and Exit Planning

The following is a post from over two years ago, and because we continue to hear such things from business owners, and know how damaging these thoughts and positions can be, we’ve decided to repost:

“It’s too late to turn back now.”  “We’re too swamped for that now.”  “We can probably do that ourselves.”  “It’s crazy busy around here.”  These are just a few examples of “Expensive Sentences” mentioned by my friend Jack Quarles in his latest book, Expensive Sentences, Debunking the Common Myths that Derail Decisions and Sabotage Success.

Jack explains in his book how conversations and discussions containing Expensive Sentences lead to decisions that impact the future of businesses, families, individuals and nations.  How the faulty logic and false constraints of Expensive Sentences can lead to derailed and costly decisions.  He describes how conventional wisdom such as “You get what you pay for” or “We can’t change horses in mid-stream” can be a very costly and destructive trap.  Jack paints a picture as to how we can over time drift away from a disciplined analysis of a decision and instead be drawn by a “particular idea, as if pulled by gravity.” 

When it comes to Exit Planning, or designing and implementing a plan to successfully and responsibly exit from a business, there is a seemingly endless supply of “expensive sentences”.

Such as:

“I’m not ready to exit yet…I will begin planning when I’m ready to exit “ 

“I am confident our business would be very attractive to a strategic or financial buyer”

“I know what my business is worth…I don’t need a valuation”

“I can sell my business for enough to live on for the rest of my life” 

“Yeah, I think we arranged it so that my spouse will get the business when I die” 

“I’m not worried about my employees leaving if I die…I have been good to them and they’re very loyal”

“One of my friends, who is in the same business, sold for $$$$...I’m sure I will be able to sell mine for at least that much”

“I don’t need a financial needs analysis.  I know about what we would need.”

“I am confident I can sell my business when I want or need to”

Business Owner Exit Planning employs a process requiring analysis that results in a strategy that will allow you to exit successfully and responsibly.  Avoid the costly and destructive trap of expensive exit planning sentences and begin the exit planning process today.

Register today for our ExitReadiness® BASECAMP and address these “expensive sentences”.

5 Reasons Why Your Business Is Too Dependent On You

If you were to draw a picture that visually represents your role in your business, what would it look like? Are you at the top of an organizational chart, or stuck in the middle of your business like a hub in a bicycle wheel? 

The Hub & Spoke model is a drive that shows how dependent your business is on you for survival. The Hub & Spoke model can only as strong as the hub. The moment the hub is overwhelmed, the entire system fails. Acquirers generally avoid these types of managed businesses because they understand the dangers of buying a company too dependent on the owner.

Here’s a list of the 5 top warning signs that show your business could be too dependent on you.

1. You are the only signing authority

Most business owners give themselves final authority… all the time. But what happens if you’re away for a couple of days and an important supplier needs to be paid? Consider giving an employee signing authority for an amount you’re comfortable with, and then change the mailing address on your bank statements so they are mailed to your home (not the office). That way, you can review everything coming out of your account and make sure the privilege isn’t being abused. 

2. Your revenue is flat when compared to last year’s 

Flat revenue from one year to the next can be a sign you are a hub in a hub-and-spoke model. Like forcing water through a hose, you have only so much capacity. No matter how efficient you are, every business dependent on its owner reaches capacity at some point. Consider narrowing your product and service line by eliminating technically complex offers that require your personal involvement, and instead focus on selling fewer things to more people. 

3. Your vacations… don’t feel like vacations

If you spend your vacations dispatching orders from your mobile, it’s time to cut the tether. Start by taking one day off and seeing how your company does without you. Build systems for failure points. Work up to a point where you can take a few weeks off without affecting your business. 

4. You know all of your customers by first name 

It’s good to have the pulse of your market, but knowing every single customer by first name can be a sign that you’re relying too heavily on your personal relationships being the glue that holds your business together. Consider replacing yourself as a rain maker by hiring a sales team, and as inefficient as it seems, have a trusted employee shadow you when you meet customers so over time your customers get used to dealing with someone else. 

5. You get cc’d on more than five e-mails a day 

Employees, customers and suppliers constantly cc’ing you on e-mails can be a sign that they are looking for your tacit approval or that you have not made clear when you want to be involved in their work. Start by asking your employees to stop using the cc line in an e-mail; ask them to add you to the “to” line if you really must be made aware of something – and only if they need a specific action from you. 

Register today for our next ExitReadiness® BASECAMP

"Why Should A Business Owner Build To Sell?": Interview with Author and Founder of The Value Builder System™ John Warrillow

A new client to our firm will first go through the essential step in our process of clarifying their financial and values-based goals. And while at the same time having an additional goal in mind of identifying their ideal route for exiting the business.

We recently had a client successfully sell their business to a key employee and one of their children, and another client sold to a third-party strategic buyer. A primary reason they were both able to leave successfully was that their businesses were sellable. The businesses had value apart from the owner, they were profitable with strong prospects for growth, and had other drivers of business value that were attractive and strong.

If you want to be in control with a number of options for your eventual exit, then right at the heart of your exit plan will be an emphasis on building the business the right way today. We very much enjoyed a conversation with John Warrillow, the Founder of The Value Builder System™ recently on the ExitReadiness® PODCAST discussing the importance of “building to sell”. You will be well served if you invest 50 minutes to listen in and learn from John’s personal experience as a successful entrepreneur and his analysis of over 40,000 businesses.

Those of you who listen to the podcast with John will also be provided a code for a 25% Discount on our next ExitReadiness® BASECAMP on July 31st at The Lurn Center in Rockville, MD.