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Plan now for selling
your business later

It's 6 a.m. Hawaii time as I begin my phone appointment with a new business-coaching client from Pennsylvania. Joe sounded frustrated as he related his story.

"I'm 57 and I've been running my own business for 30 years. Now it's time to sell my company, and I realize it's not worth what I thought."

Like so many other small-business owners, Joe was dismayed why something he had worked so hard at for so many years had so little value. It's a story you can totally avoid telling yourself.

After selling two businesses and helping many other owners prepare their small businesses for sale, I've found there are three basic keys to building a high-value company:

» Cash flow. When it comes to valuing a business, cash flow begins with "net" taxable income. Then you add back things like depreciation, taxes paid, owner's salary/benefits, and other ownership "perks." A multiple is then applied against your cash flow based on your industry and geographic area.

These "add backs" will always be a factor in any small business, but when you're preparing to sell the cleaner, you can make your cash flow the better. Start backing off your perks two to three years out from when you intend to sell your business.

» Retained earnings. This is the profit that your company keeps each year. A record of steadily increasing retained earnings not only increases the value of your business, it also lowers the risk potential for buyers.

Here's how it works for most small businesses: Owners often begin in the red when they start up. By the third year, most businesses will reach a break-even point. Then a year or so after, the business begins to show retained earnings. That amount will range from a couple thousand dollars to $10,000 or more depending on your industry. But what's important is that from then on, your books should show a steady climb in your retained earnings.

» Operational systems. Formalized systems for hiring, managing, marketing, and operations are critical in creating a high-value business. Having policy and procedure manuals, written operational systems, and customized software systems not only improve the profitability of your company, they turn your small business into an asset that someone will want to buy. Without formalized systems, all you have is a "job." And no one wants to buy a job!

If you want to build a salable small business, you need to take action now. Put together an advisory team with your business coach, accountant, and a business broker. Develop a plan, and then work that plan.

The sooner you do it, the more value your company will have when it comes time to sell.

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