It’s hard to look at our business through an investment lens. No matter how you approach it, all you can see is the decades of blood, sweat and toil you’ve put in the business to get it where it is today. Regardless of the current state, you see only where it started, the process getting it there and the potential moving forward.
Unfortunately the market place for your business takes a harder line in describing, classifying and valuing your business.
There are two distinct business types when it comes to selling a business: Lifestyle and Investment. Depending on which one your business is, it will impact your ability to sell it for a profit.
Most business owners I work with always want to classify their business as an investment. In reality, most businesses tend to be lifestyle business.
To help shed light on what type of business you have, below are several classifying questions:
- Are you the key employee?
- Are you taking all the profits out of the company?
- Are your financials used to minimize taxes?
- Are your revenues flat?
- Do you have a business plan rather than an enforced budget?
If you answered yes to these questions, then you are a lifestyle business. You enjoy the luxuries of being the one in charge, controlling the direction and personally reaping the financial rewards.
Most times what you find in a lifestyle business is a dedicated owner who loves what they do. The business growth is limited to maintain their ability to oversee all the operations. Lifestyle businesses may have employees, but the owner maintains the ultimate authority to implement changes. These types of businesses are very successful at achieving a particular life standard for the owner.
Celebrate the success of the business and the benefits that it brings to your life!
Just be aware that lifestyle businesses are much harder to sell. Potential buyers see you as the main value driving the business success. When you leave, so does the value.
If you answered no to those five questions, then you most likely fall into the investment business category.
These six characteristics will describe your business:
- You have organization charts with officers, directors, and managers linked to job descriptions that outline who reports to whom.
- Employees have the authority to enforce, reward, coach and expand their reports without your approval.
- A budget that is not only in place, but also enforced and managed against.
- Profits are left in the company to expand and reinvest.
- There is a marketing budget with a strategy supporting the efforts.
- You can take two weeks vacation and the company still grows despite your absence.
When someone approaches buying a business, they will look to see which category you fall by asking the same type of questions.
The strongest investments are into businesses that is its own entity, almost its own person if you will. They have their own FEIN number. They operate independent of any one individual. The business has both long-term and short-term goals. These are investment businesses.
This is not to undercut the value of a lifestyle business to you and your family. It’s only to highlight the differences if you were to sell a lifestyle business. Both business models play important roles in the market.
Regardless of your business classification, every business needs a long-term exit strategy.
There are typically three ways to exit a business:
- Sell off the parts, settle the accounts and close up shop;
- Pass the business onto a family member;
- Sell the business.
If you currently are operating a lifestyle business and your ultimate goal is to sell, then it may be time to look at options from taking it from a lifestyle business to an investment business. This process is completely doable, yet can be challenging.
And it takes time.
You need to find, hire and integrate the right senior managers. You need to build a budget. The hardest part will be removing you from the center of your business. The further you plan ahead, the further you design your exit, the better chance you will have in actually being able to reap some financial reward of selling it.
If you need assistance in developing your strategy to transition from a lifestyle business to an investment business, contact me today. Together we can work to make your business exit a profitable one.