When it's time to get out

By HEATHER DOUGLAS

What are you going to do when you "finish" with your small business? Do you have an exit strategy?

Have you benchmarked the important steps along the way to achieving this and are you working to turn them into reality?

Small business owners generally have a variety of exit options. There is no "right" answer and you will need to decide for yourself which one (or combination) suits you.

Will you work until you drop?

Will you simply pack your home office into boxes and stack them in the garage when you're through?

Will you build up the value of your business and sell it as a going concern?

Will you build up the value of your business and bring in investors to own part - and perhaps eventually all - of it?

Will you build up the value of your business, have someone manage it and live off the income without putting in the time personally?

Will you sell the business to a partner, co-owner or employee?

Will you sell the blueprint for your business many times over as a franchise?

Will one or more of your children succeed you?

Many business owners find, at the end of the day, that their business is not worth what they thought it was and have to downscale their retirement lifestyle when they sell it for less than they had bargained for.

Home business owners are particularly at risk because it is even harder to put a value on a business which "blends" into the family home and where it's not always so easy to tell what belongs to the home or family, and what belongs to the business.

Most home or small businesses also rely heavily on the operator's personal involvement - many simply can't exist without it.

So how do you go about making sure you are building an asset worth selling (and one which a buyer sees value in too)?

If you are planning on selling your business or attracting investment, you'll want to know what it is worth. It can be disappointing to realise that prospective buyers don't think it's worth as much as you do.

After all, it has cost you blood, sweat and tears to get it to the stage it is at - and you feel you should be compensated adequately for that.

There are several ways businesses can be valued. The book value of the business is how much it is worth on paper. The market value is what a buyer is prepared to pay for it. The replacement value is what it will cost someone to duplicate it if they start from scratch.

Often a combination of these methods is used, but most buyers look especially closely at the current and potential profitability. If you can't show a good, solid return, or at least the potential for one, you'll almost definitely be offered fewer dollars for your business.

More than that, the return should be one anyone in the business can expect, not just someone who knows the customers as well as you do, or who has your individual skills.

If you are looking at an exit strategy that involves handing over the business in any form, the earlier you start taking specific steps to build value into the business itself, the more likely you are to realise a better price for it.

There are several steps to take to maximise the value of your business:

* Create systems and procedures, and write them up in a manual - that way your business can function just as well without your presence as when you are in it.

* Automate as much as you can - that way, it's much easier for a new person to maintain the momentum and the business is more attractive because it requires less time to run.

* Put your business and marketing plans in writing - that way, your successor will know what you have done to achieve what you have achieved (they certainly can't read your mind).

* Keep records - that way, there's a documented history for the next person to refer to.

* Keep an excellent set of books - that way, anyone investing money into the business is more confident they are getting a fair deal.

* Where possible, get clients to sign contracts which "lock in" their business - that way, if you sell the business you are selling it with good potential to continue earning the revenue you've been earning.

* Do the same with suppliers and possibly even associates - that way, the business can continue to offer the same type and quality of product or service it does with you at the helm.

* Develop a strong brand identity. Dissociate it from you in the minds of your customers and suppliers as much as possible. Do the same with your advertising. That way, you pave the way for a smooth handover.

In other words, groom your business before putting it on the market.

* Heather Douglas is the managing director of Home Business New Zealand.