Many small business owners work hard and for many years building their businesses, only to find out that they cannot sell them for good prices when they want to retire. As a result many owners will continue working hard in the business into their old age instead of retiring early and resting. You can avoid this unpleasant outcome by building your business as an investment from the outset.
An investment is an asset that has value. It generates income for the owners and it can be sold for a profit. Look at property. It generates a stream of rental income and can usually be sold at a profit after some time. The good thing is that the asset generates passive income; the owner doesn’t have to “run it” on a daily basis. That’s how your business should be when you’ve built it as an investment.
There are a few things that you can do to maximise the value of your business. First, you need to have an exit strategy from the beginning, a plan of how you will get out of the business. Will you sell the business to someone when you retire? Will you pass it on to family members? Will there be anybody willing to buy the business?
For you to be able to sell the business, make sure that the business can operate without you. This can be achieved by having well-documented operational structures, defined organisational leadership, and a good business plan.
Operational structures consist of a good record-keeping system, accurate financial statements, detailed customer records, supplier records and accurate stock records. Getting your financial statements reviewed or audited by a professional accountant is a good way of ensuring their accuracy and credibility.
The business’ standard operating procedures should be documented. This should include all the important activities, from how your products are manufactured or services delivered, to how the receptionist answers the phone. The documentation will list all the essential tasks necessary in running the business and how they should be carried out. Apart from providing guidance to management and staff, the document will also act as a training manual for new staff as well as a supervision, monitoring and control tool. By following the standard procedures, everyone in the business will do their jobs and operations will flow smoothly.
Because of the importance of people in any business, there should also be documented human resource policies and records. There should be a list of all the jobs in the company with detailed descriptions. It is important that everyone knows their position and what is expected of them in the company. An employee handbook will be essential if you have employees. Smaller companies may think of human resources policies as not being important, but they form the backbone of the company and will enhance a business’ value.
A good management structure adds value to the business. Although it’s alright to micro-manage everything when you are starting up, it is better to gradually delegate responsibilities to your managers and staff. This frees you up to spend more time on more important tasks, such as growing the business, developing new products and services, as well as building new relationships. Owners who spend all their time working in the business exhaust themselves and end up losing the objectivity that is necessary for making strategic decisions and plans. Instead, develop your managers and staff so that they can run the business while you provide leadership.
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A good business does not rely on a few customers or suppliers. To build a valuable business, diversify your customer and supplier base. This will reduce the risk of the business failing when a relationship with a major supplier or customer turns sour.
When you take these steps to build your business into a real investment, you will be rewarded in two ways: the business will generate passive income without you working in it, and it will have a high value when you sell it.
I wish to thank all those who are sending me emails in response to this column; your feedback is very important, please keep them coming. This month’s BusinessLink networking breakfast meeting will be on Friday 28 October. You will find more details on my blog http://chichonip.wordpress.com. Wish you success in growing your business.
lPhillip Chichoni is a business planning and financial management consultant who works with SMEs and entrepreneurs. He may be contacted on email: [email protected].
