Can you sell your business for a profit? (Part 1)

Written by Jamie Irvine | 5 Minute Read

Not everyone wants to sell their business, in this article, we will discuss why building your business so that it can be sold, not that it must be sold, is the important final piece to building a great business.

Many people I talk to struggle with this concept.

I should start here by saying that not everyone wants to sell their business and that’s okay. Some people want to build legacy businesses that they will pass on to family members, others plan on working till they die because they love what they do, and I say, “each to their own”. However, even if you do not ever plan to sell your business, building your business so that it CAN be sold is what is important.

Let me tell you a true story.

When I was running my contracting business, I was in my 30's. My wife and I had figured out that for our business to be a great business we needed to create systems.

We had come to appreciate that producing a predictable result and creating systems that allowed us to operate the business independently of us was a critical factor in achieving scale.

As a natural delegator and someone who never wanted to do the hard-physical labor that our services demanded this was not just a revelation, it was music to my ears. Being the leader and having people doing the work was almost too good to be true.

At this point, we thought we had it all figured out. This feeling of accomplishment was reinforced when I got a call from a competitor. Phillip Moore (not his real name) was a 55-year-old competitor who had been in business for over 30 years.

The purpose of Phillip Moore's call was to ask me one question:

This is what he said, "Jamie, your business is remarkable, you have only been in business for a few years and you are growing so quickly, would you be interested in buying my business?"

I agreed to meet with him and what happened next reminded me of how much I still had to learn.

Phillip explained that the years of hard work had taken its toll on his body and he was close to needing to retire. Everything sounded good so we got to the business of buying his business.

When we did due diligence, we discovered something surprising. Despite his business having decent revenue and reasonable profit, his valuation was much too high. At the end of the day, his business was only worth about $5000.

How is that possible?

How could a 30-year-old business with solid annual revenue and gross profit margins of 40% be only worth $5000?

My valuation of $5000 was based on the following factors:

1. Phillip Moore was the business, he had no employees, only his sons who despite working with him had no desire to take over the family business much less work for me as employees. As soon as Phillip left I would have to hire additional people and train them.
2. He wasn't even including his truck in the equipment assets because the business didn't own the truck, Phillip did. Which meant if I did buy his business, in addition to needing to hire employees and training them I would have the expense of purchasing a work vehicle. The used tools Phillip was including were worth $5000.
3. The customer list he had was worthless because those customers bought services from Phillip, not his business. As soon as they found out Phillip was gone they would put their business out to bid because nothing was under contract. Since we were on their bid list already all I had to do was wait and I would get a free opportunity to win that business. Which is exactly what happened and my business did win some of those bids on work Phillip had previously done.

30 years in business and all Phillip Moore owned that he could sell was $5000 in used tools. I didn't want to insult him so I never made an offer and I suggested that his best course of action was to find someone that was looking for a job, to step in when Phillip stepped out. That is what he did and although I don't know what Phillip got for his business I am confident it wasn't close to his asking price.

This had a profound effect on me.

There was no way I was going to run my business for 30 years, destroy my body in the process, and have nothing to show for it in the end.

I was not going to become Phillip Moore.

Just for the record, 4-years later I listened to my own advice and sold my contracting business for a great profit. :-)

It was this experience that made me realize that in order to build a great business you must build something that can be sold for a profit. A value that reflects the time, money, and effort that goes into building a great business. That even if you hope to build a legacy business and pass your business on to future generations that might not happen. Look at Phillip Moore, his sons had no interest in taking over the business.

There are many reasons to start a business but in my opinion, the only reason is to make one last sale. The only sale that matters. The sale of your great business for a great profit.

Why is this so important?

The McDonald’s brothers are a perfect example of why this is so true. The McDonald’s brothers in San Bernardino, California needed Ray Kroc to make McDonald’s what it is today. They had invented the “Speedee System” necessary to run their restaurant like no other restaurant in the world. They had even tried to franchise but ultimately, they had stopped because they lacked something Ray Kroc evidently possessed.

No matter how high you can go there will always be someone else who can go higher. It’s your job to find that person and sell them your business.

Why?

Why would anyone build a great business only to sell it?

There are three reasons why I believe ultimately selling the business is important:

1) Starting a business with the intention of selling the business changes how you think about the business, how you create the systems that operate the business, and how you build the business to be predictable, independent and a growing entity.

The business is not a job for you the owner, it’s a business, an entity that exists independently of you the owner. An entity that produces predictable results for many people, an entity that has needs of its own, and an entity that grows and scales.

To truly create and build a great business you must build the business differently. To build the business differently you must think about it differently. To think about the business differently you must have a different objective for the business.

That objective is to sell the business.

2) The second reason is more emotional and idealistic.

Every great business grows.

You as the owner conceived the idea of a great business.

You turned that idea into reality by giving birth to that idea in the form of a small business.

You have worked incredibly hard to protect your small business, to guide it from its earliest form, a mere infant in the business world, to an ever-maturing business that resembled a child, then an adolescent, then a teenager, and finally a fully developed mature business that has finally reached adulthood in the business world.

Like a parent who has raised a child that is now an adult, you must let the adult go and watch to see what they do in the world.

It’s the same for you and your great business, you have done your job, you created a business, you nurtured it, and you grew it to maturity and now you must let it go and watch what good it does in the world.

3) The third reason is something I call “the Curve”.

The curve that every physical thing in the known universe including you and your business is destined to follow.

Sir Isaac Newton said, “what goes up must come down” and I say, “what begins must end”!

The longest business in the history of mankind lasted 1500 years but it did end. 96% of businesses last less than 10 years.

You cannot escape the curve.

So, build your business into a great business and sell it before the curve takes you and your business to its natural end.

In Conclusion

Remember what is truly important is that you build your business so that it can be sold, because one day you may just need to. It is also important to know what you can do, what you can’t do, when to go all the way, and when to get out, this is all part of creating, growing, and then finally selling a great business.

This article was originally published on www.jamieirvine.ca.