When you start a business you receive no shortage of advice, most of it well-meaning and often in the form of familiar platitudes. “Follow your passion...hire slow, fire fast...don’t quit your day job,” and the like. Yet there is one invaluable piece of advice that is rarely offered, and when it is most entrepreneurs shrug it off: Begin with the end in mind.
The thought of how it would all end never crossed my mind when my husband, Chris, and I started our retail coffee business, Caffinity, in 2003. We were so consumed by managing construction, complying with health codes, and hiring and training baristas, that building a business we could sell someday was the furthest thing from our minds.
Then someday arrived.
After three years and two locations we’d built a successful business, but discovered that -- while we’d had a lot of fun -- the food service industry wasn't for us. Chris is a serial entrepreneur and suggested we sell the business. I stared at him blankly, all the usual questions running through my mind: how do you sell a business and keep it quiet, where do you find help, and what kind of buyer would be interested?
Until that moment, I had never thought about what a buyer would think of our business. Fortunately for us, Chris and I had built our business with enough of the qualities that buyers look for to make it highly sellable. Here are a few of the things that buyers loved about Caffinity:
Selling a business is a notoriously difficult undertaking with a high failure rate. Think about it for a minute; how many people do you know who have successfully sold a business? It’s a small club of entrepreneurs who have successfully completed all three phases of business ownership.
There are a number of reasons why businesses fail to sell, but one of the primary reasons is the strength of the financials -- also known as “bad books.” At no other time will your financial statements be scrutinized so heavily as during a buyer’s due diligence. Having accurate, up-to-date Profit and Loss Statements and Balance Sheets is mandatory.
No matter what kind of business you own or how big it is, there is no excuse for bad books. Any investment you make in managing bookkeeping, accounting, and payroll will pay off in spades if you ever try to raise capital for your business or sell it to an outside buyer.
High Profit Margins
Food service businesses tend to have low profit margins, and depend heavily on the owner’s ability to manage costs, human resources, and customer expectations simultaneously. Our coffee business used a drive-thru model that is popular in places like our hometown of Seattle. The drive-thru model irked our competitors with sit-down establishments to no end. We captured more of the lucrative morning rush of caffeine-fueled commuters with a fraction of the overhead. As a result, we had net margins upwards of 20 percent in an industry where an average less than five percent was typical.
Strong Corporate Culture
One of the things we focused on with Caffinity was delighting our customers. That meant hiring great baristas and training them to provide both delicious drinks and an exceptional customer experience. Between a good hourly wage, great tips, loyal customers, and a fun work environment we had remarkably low turnover for the industry.
When we sold our business we fell prey to a common misconception, namely that some of our most loyal employees might leave their jobs when we ceased to own the business. As it turned out, every one of them stayed on with the new owner. We realized later that our employees’ loyalties were to the company first and its owners second, as it should be.
Owners Were "Operationally Irrelevant"
In the beginning we worked many 16-hour days, to be sure. But as the business started to hum along we were able to delegate almost all of daily operations to our employees. The longer we owned the business, the less we did. By the time we sold the business there were only a few back office tasks that we handled ourselves.
One of the hallmarks of a sellable business is that the owner is 'operationally irrelevant'. A business that depends too much on the owner’s involvement can be difficult or even impossible to sell. A good way to test whether or not your business depends too much on you is to start taking more vacations -- the longer the better.
Opportunities for Future Growth
It’s worth noting that most buyers won’t pay much, if anything, for potential. But all buyers are looking for a business that has numerous opportunities for future growth. Whether it’s growth in the industry, geographic reach, new customer segments, or product lines, a sellable business comes with a bright future attached.
Chris and I actually had a business plan for expanding to six stores covering two counties. We had the financial projections and locations laid out, as well as a proven recipe for success. While future potential didn’t factor into the company’s value, it went a long way towards creating buyer interest and making it an attractive investment.
While none of us has a crystal ball when we start a business, it’s important to remember that nobody runs their business forever. That “someday” will come for all of us. Whether you own your business for three years or three decades, it will be much easier to sell -- as well as more profitable and enjoyable to run -- if you’ve built it with a buyer in mind.
Barbara and her husband, Chris, founded Allan Taylor & Company after successfully completing the sale of their own business in 2006. In addition to working with business-owner clients, Barbara enjoys writing about the process of selling a business, and why it's never too soon to start thinking about what it would take. Barbara wrote for the New York Times small-business blog, You're the Boss, for three years, and is also a public speaker. She was listed as one of “7 People Every Entrepreneur Should Follow on Twitter” by CBS MoneyWatch. You can follow Barbara at @ballantaylor.