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What You Can Do To Prepare Your Business For The Dangers Ahead

Preparing Your Business From The Dangers Ahead

Almost every decade brings a slew of scary predictions. Is a new superbug on the way? Is the stock market about to crash? Can the economy survive?

Although these are excellent questions, without a crystal ball you may feel helpless. In any case, there are three practical steps you can take to prepare yourself for whatever the coming years will bring:

Strategy #1: Don't Try to Time the Market

It is common for founders to attempt to time the sale of their business to coincide with a peak in an economic cycle, reasoning that they will be able to get the best price when the economy is booming.

It's true in theory, but when you sell your company, you have to do something with the money. Maybe you'll invest in real estate or buy stocks. Yet, most investments are impacted by the same macroeconomic environment as your business, which means you'll be investing in the same frothy market.

Rather than timing the market, you should consider selling when your business meets two criteria:

First, when your company is on a winning streak, it commands a premium over average performers in your industry. Sell when your revenue is growing, gross margin is improving, employees are happy, and customers are satisfied.

Second, don't sell before you have all the information you'll need to survive due diligence. The acquirer will need some time to verify that your business is what it appears to be after you agree to terms. In addition to your financials, customer contracts, employee agreements, the way you produce your product or service, your sales and marketing approach, and just about every aspect of your business, a sophisticated buyer will investigate every aspect of your business.

You cannot wait until due diligence to prepare this package of information. The volume of questions will take too much time from you. React slowly to an acquirer's request for information and you'll experience "deal fatigue." This malaise happens when an acquirer loses interest because it takes too long to close an acquisition.

In order to prepare yourself against whatever the economy may bring in the years to come, you should sell when you're on a winning streak, and you have the data collected (and organized) to sail through due diligence with ease.

Strategy #2: Pick Your Lane

In recent years, the global economy has been growing at a rapid pace, driven by low-interest rates and optimistic consumers, which can be a dangerous time for Founders. When the economy is hot, it is tempting to broaden your product and service offerings beyond those you started with, since customers appear to be willing to buy anything from you.

With too much diversification though, you could become less attractive to an acquirer. Acquirers buy what they could not quickly build on their own.  When you diversify too widely, a buyer might conclude that it would be relatively easy to compete with your similar products or services.  In this scenario, even though you'll want to get paid for all of your business, they may only want to acquire a small portion of it.

Remember that acquirers only purchase businesses that they couldn't easily build themselves. They put a premium on transactions with a definite competitive edge - for instance, a brand with a loyal following or a protected technology patent.

Whatever the economy brings in the years to come, do one thing better than anyone else, and you'll always have a ready pool of potential acquirers for your business.

Strategy #3: Build A Vision Board

A vision board is a display of images that show your future goals. Create one by picking up a stack of magazines and cutting out pictures that appeal to you.

When your company has moved beyond the startup phase, looking at your vision board will help you avoid the inertia that can set in afterward. It might be less exciting to run a business when you aren't worried about finding the next customer or making payroll. When you are no longer challenged by your creativity and problem-solving skills, one day might pass into the next and you may become content, but perhaps not truly happy.

Recall a time when you felt most content and happy. You were probably doing something new, perhaps in a new place with new people, learning, contributing and growing. Most owners are happiest when they are starting and growing a business, but when a company matures, it can become stifling.

Leaving a successful business isn't always easy. Your lifestyle needs are met by your business, so why leave? Here's where a vision board comes in handy. You can then decide whether you are happy or simply content.  Regardless of the state of the economy, if you find yourself comfortable, but not necessarily happy, that might be the right time to sell.

 

 

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The information contained in this article is general in nature and is not legal, tax or financial advice. For information regarding your particular situation, contact an attorney or a tax or financial advisor. The information in this newsletter is provided with the understanding that it does not render legal, accounting, tax or financial advice. In specific cases, clients should consult their legal, accounting, tax or financial advisor. This article is not intended to give advice or to represent our firm as being qualified to give advice in all areas of professional services. Exit Planning is a discipline that typically requires the collaboration of multiple professional advisors. To the extent that our firm does not have the expertise required on a particular matter, we will always work closely with you to help you gain access to the resources and professional advice that you need.

Any examples provided are hypothetical and for illustrative purposes only. Examples include fictitious names and do not represent any particular person or entity

This is an article originally published by The Value Builder System, and presented to you by our firm. We appreciate your interest

 

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