Building to Sell
You have to plan if you want the option of selling. There's a lengthy process you have to go through to get a company ready for sale.
Timing is everything in business, and now is probably not the ideal moment to put your company on the selling block, for reasons that Jill Andresky Fraser makes clear this month in her review of what's happened to the companies featured in Inc's Business for Sale column. But don't let that stop you from getting your company ready for sale if you think you might be looking for a buyer in the future.
Selling a private business can be a challenge in even the hottest of markets. To have a decent shot at getting what you want, you have to give yourself plenty of time to lay the groundwork for a sale, and I'm talking about years, not weeks or months. The first step is to make sure you understand what you have -- or could have -- that somebody else might want to buy from you. It may not be what you think.
Let me tell you about someone we'll call Tony, who came to me for advice about building up her specialty-foods business. She had created a line of gourmet jams, chutneys, and other such products that she was selling through department stores and specialty shops. The company was doing about $750,000 a year. She said that she wanted to double or triple her sales in the next few years but wasn't sure how to go about it.
Although she felt she was the best salesperson for her products, the business had grown so much that she didn't have time to sell anymore. She was too busy processing orders, sending out invoices, tracking inventory, and handling other administrative duties. On the other hand, she couldn't afford to hire her own salespeople. As for independent sales reps, who carry products from a variety of companies, she'd tried using them already. It hadn't worked. What did I think she should do? I suggested that she might want to hire an administrative person and go back to selling. Maybe, she said, but her attempts to do that in the past had all ended in failure. Besides, she didn't really like selling. "I can do it, but I don't enjoy it," she said.
"Well, what do you enjoy?" I asked. "Why do you want to double or triple the size of your business anyway?"
"To tell you the truth, I really just want to sell it," she said. She'd already signed a contract with a business broker. She felt she had first-rate products and a promising brand to offer a buyer. If she found the right one, she might even stay on as a consultant. But mainly she wanted to sell the company as soon as possible and get a good price for it. To do that, she figured she had to increase her sales substantially.
In fact, Tony was making a classic mistake. When you decide to sell your business, what you need to ask first is not "How much can I get for it?" but "Why would someone want to acquire this business?" You should be identifying the types of potential buyers and finding out what they're looking for.
Building to sell is different from building to operate. You have a different goal, and you need a whole different thought process from the one you'd use if you were planning to hold on to the company indefinitely.
I know a guy, for example, who has been very successful at building restaurants to sell. He has a regular pattern. He'll buy a failed restaurant, including licenses, facility, kitchen equipment, and other restaurant paraphernalia that the previous owners bought new. So he gets almost everything he needs at a bargain. Then he changes the restaurant's name and concept, brings in new staff, and reopens as a place for fine dining, charging very reasonable prices.
That's his trademark: excellent food at low prices. The city newspaper rates restaurants. This guy's places are the only ones in their category that are rated excellent with two dollar signs (moderate pricing). The other excellent-rated restaurants all have four dollar signs (expensive). Not surprisingly, his places are packed.
So why doesn't he charge as much as his competitors? Because his goal is different from theirs. He's building to sell, and he has his own formula for doing it. He knows he'll find a buyer -- and get the price he wants -- if he can show high sales volume and great potential for increasing profits. After all, the new owners can raise the prices on the menu to the competitors' level.
Granted, the founder could do the same thing and probably make more money while he still owns the place. But he has figured out that he can earn a better return in the long run by keeping his prices low, building up sales volume, and selling the business at a premium price.
Of course, most of us are a little different from the restaurant guy in that we don't start companies with the intention of selling them. The thought of cashing out and moving on comes later, after we've been in business for a while. At that point, you have to reorient yourself and make some changes in the way you run the company. It's hard to know what direction to move in, however, until you've identified your potential acquirers.
Take my records-storage business, CitiStorage. A few years ago my partners and I decided that we should run the business as if we were building it to sell, if only to make sure we'd have options down the road. Given CitiStorage's size, the most likely acquirers were a few giant companies that also do records storage. We began talking to the giants, and we learned some interesting things.
They told us, for example, that they wouldn't hold on to our real estate if they bought our business. They'd sell the land, the buildings, and the storage racks to someone else and sign a long-term lease to use the facilities. The giants, it turned out, were interested only in acquiring our accounts.
With that important piece of information in mind, we proceeded to spin off the land, buildings, and storage racks into a separate entity. If we go through with a sale in the future, we'll be able to sell the accounts, keep the real estate, and become the acquirer's landlord. We'll do a lot better in the long run by taking that approach than we'd do if we sold the company as a single entity.
That's just one example of the changes we've made. We've also done some refinancing to reduce CitiStorage's debt, which would otherwise be deducted from the selling price. And we've made some selective acquisitions of small records-storage companies, whose accounts we can add to ours and eventually sell at a significant markup. Even if we ultimately decide to keep the business, we'll be better off for having made the changes.
My point is that you have to plan if you want to have the option of selling in the future. There's a lengthy process you have to go through to get a company ready for sale. You need to do enough research at the beginning to have a decent chance of winding up where you want to be at the end.
Which brings me back to Tony. I told her that before deciding how to build up her sales, she needed to find out what kind of sales her potential acquirers would be most interested in. My guess was that some buyers would be looking for shelf space in specialty stores, while others would want it in department stores. If so, Tony should probably focus on building her sales through one type of retail outlet or the other, but not both.
Remember, her goal is to sell the company as soon as possible. She needs to figure out how she can get there fastest. Is it easier for her to sign up specialty stores or department stores? What kind of placement can she get in each?
So she has some investigating to do, followed by a period of experimentation. Then, once she's decided on her path, she needs to follow it single-mindedly, resisting the temptation to go after sales that don't fit in with her plan. If she does that, I feel confident that she can reach her goal and sell her company for the amount she wants, but it will no doubt take a couple of years.
By then, moreover, the market may have recovered enough for her to get a higher valuation than would be possible today -- or she may have decided her company is doing so well that she really doesn't want to sell it after all.
Norm Brodsky is a veteran entrepreneur whose six businesses include an Inc 100 company and a three-time Inc 500 company. This column was coauthored by Bo Burlingham. Previous Street Smarts columns are available online at www.inc.com/incmagazine/columns/streetsmarts.
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NORM BRODSKY | Columnist
Street Smarts columnist and senior contributing editor Norm Brodsky is a veteran entrepreneur who has founded and expanded six businesses.