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I have often explained to clients that there are very few businesses where the main measurement of success is money. The success of the business is usually measured by something else such as number of customers, units sold, regions serviced, number of outlets, etc. The financial success will follow if the natural key performance indicator (there’s that term again!) is met and exceeded.
Ross Greenwood points this out in his recent discussion about business scale and trading names.
WHEN you start a business, what is your motive? Most will say money, of course. But what kind of money?
Annual profits? Or a big capital gain when you sell? The best businesses generally look for more than money. They look for sustainability: of customers, cash flow and profit.
When a business is created, a range of issues should flash through the owner’s mind: will this business survive a downturn; can it adapt to changing customer trends; a period of higher interest rates or movement in the dollar?
But business owners — just like property buyers — should also ask: “How do I make the business more attractive to potential buyers in the future?”
This is a problem many self- managed businesses face. It even comes down to one of the first decisions you make in business. Should you make your personal name the business-name? After all, will someone want to buy your name? It is the worry of many sole-operators, who can generate an income, but who never truly create enterprise value.
The methods for creating value go much further than making profit, important though it is. If a business relies, largely, on the one person who built it, then prospective buyers will be wary.
Unless a future buyer controls the business-founder with a management contract then the goodwill they’re buying will dissipate quickly. It’s even worse if the business-owner sells, but is
allowed to re-establish a similar new business that competes with their old firm.
There are many famous Australian companies that still carry their original owners’ names: among them Arnotts; Dick Smith; Coles, Myer and most of our wine brands. But at some stage in the history of each of these companies, the business became bigger than the individual.
It would have started with employees who enabled the business to carry on without the “name” but eventually external managers would have been introduced so the business could easily be sold without requiring the family presence at all. Not that this has been a happy experience for all of the families mentioned.
Another compelling reason to build a business capable of operating without its creator is the way most prospective buyers account for corporate acquisitions. In most cases the buyer acquires a business based on its profits, assets and cash flow. But in almost every situation, intangible assets (goodwill, brand and reputation) are discounted out before a purchase price is discussed.
This is even more apparent in cases of owner-operator businesses where the founder’s reputation is heavily relied upon. In other words, if they are most of the goodwill, is the business worth anything at all?
The result is that most businesses that trade on their owner-operator’s reputation (and notable here are sole-operators) continue to struggle to be sold to a third party. So much for a business being a potential future retirement nest egg.
In these cases the individual must think about other unique, saleable aspects of their business: their client list; a region or area of operation; a database of information; unique tools or processes. But one thing is clear, the act of selling a business should be considered as much as the fight for survival. Survival is one thing, capitalising is another.
