Blue Elevator Blog

Selling a Business

From the outset, this article could just as well be titled “Building a Business.”  There are probably two reasons for selling a business:

• It’s a bad business that runs poorly, provides the owner a bunch of headaches, and loses a lot of money.
• It’s an excellent business that runs great, is super fun to run and operate, and makes a lot of money.

Building a Business

I don’t know of any Founder or CEO who told me this: “I’m going to start a business in a field that I hate.  I’m going to milk it for all it’s worth, and then when I can’t stand it any longer, I’ll sell it.”  Quite the contrary.  I have met plenty of entrepreneurs with excitement, energy, and a desire to pursue their passion.  It’s just that sometime between the starting and growing of a legitimate business, something happens that causes the apple to lose its shine.

The Berkshire Hathaway Formula

As referenced on page 23 of the 2014 Berkshire Hathaway annual report, it reads as follows:

We are eager to hear from principals or their representatives about businesses that meet all of the following criteria:

1. Large purchases (at least $75 million of pre-tax earnings unless the business will fit into one of our existing units),
2. Demonstrate consistent earning power (future projections are of no interest to us, nor are “turnaround’ situations),
3. Businesses earn good returns on equity while employing little or no debt,
4. Management is in place (we can’t supply it),
5. Simple businesses (if there’s lots of technology, we won’t understand it),
6. An offering price (we don’t want to waste our time or that of the seller by talking, even preliminarily, about a transaction when price is unknown).

The Outtake

Are you the founder of a business that meets the aforementioned criteria?  We recommend that you take Warren Buffet and his team at their word and place a call.  You could “have your cake and eat it, too.”  Berkshire Hathaway is about the only company I know that will buy your business and also let you operate it.

The End Game

For the rest of you, let’s eliminate the first and last criterion.  And, let’s assume your business is readily understood (e.g., criterion #5).  Then, your business must profile as follows:

1. Reflect a history of consistent earnings.  After all, the best predictor of the future is the past.
2. Generate a good return on equity while employing little or no debt.  Not to go all “accounting” on you, but you want to build a business that generates a lot of net income and has little to no debt.  Shareholder’s equity is defined as assets minus liabilities.
3. Management in place.  Buyers of businesses want a business that runs itself.  They don’t want you – they want your business.

Building a Business

So, whether you are building a business or selling a business, both the means and the ends are the same.  Which is worth more?

• A classic car that looks and runs great.  It’s in great mechanical condition.  It’s free of dents and dings.  It fires right up and purrs like a kitten.  It’s super fast and handles great.  Anyone can drive it.
• An old jalopy that looks and runs bad.  It’s in poor mechanical condition.  It’s beat up and bent up.  It requires you to start it – because it’s finicky.  It barely moves and is almost undrivable.  Seemingly, the only person who knows how to start it and drive it is you.

Which car would you rather own?  Which car would you rather buy?  Which car would you rather sell?

And the same holds true in business.  The better your business, the more valuable it is.  The more valuable it is, the more salable it becomes.  A reprise:

• A bad business that runs poorly, provides the owner a bunch of headaches, and loses a lot of money – isn’t worth much.  In fact, you might have to pay someone to take it.  In essence, it’s a job.
• An excellent business that runs great, is super fun to run and operate, and makes a lot of money – is worth its weight in gold.  In fact, you might not take anything for it.  In essence, it is a cash cow.

Summary

At Blue Elevator®, we help our clients build their businesses.   Our trademark is Innovate, Accelerate, and Replicate®.

And, that’s the formula you need to follow to build a salable business.  Our advisory is designed to help business owners build businesses they can one day sell.  But, then again, if you had a great classic car that looked and ran great, would you really want to sell it?

God willing, why not build a successful business that you would be proud to sell – or keep?  The choice is yours.

We’d love to hear from you.  Contact us!