AUDIO VERSION: Smart Prey

Last week when I was writing about predators and prey, I realized I had a story to tell – a story about being a “smart prey”.

You’ll remember, in our definition, prey is a business that has recognized that the best option is to sell itself while it is still profitable.  This is a business that is not able to meet its debt payments but is operationally still functioning well.

Willing Prey

There was a point in my business life when I willingly became prey, not because I couldn’t manage the debt payments, but because I was moving on to another phase in my life and wanted the capital built into the business to fund my next move.  However, I had made a fundamental mistake in the years leading up to the sale and I want to share that mistake with you so you don’t make the same mistake I did, one that potentially cost me hundreds of thousands of dollars.

When I first started in my bookkeeping business, which over the years morphed into an accounting and financial planning business, I was happy to gain each new client.  In the early years I had extra time and too little money, so each new client filled in my time and increased my total billing.  As my business grew, I had less and less time and more and more money, so I hired a few people to help me.

The day came, though, when my time was absolutely full.  It was a typical supply and demand point, where the demand for my services exceeded the supply of time to provide them.  I had a choice to make:  I could hire more people and continue to grow my business, with the risk of lowered quality as the business got farther and farther from my direct supervision, or I could raise my rates and limit my clients to those who could afford my services at the higher rates.

The Mistake

I chose to develop my business into a more boutique service with fewer clients, more personal interaction, higher rates, and maintain the current staff level.  I set a minimum rate and only accepted clients who had businesses or personal situations that warranted that level.  I actually did this several times in the course of my business:  as I reached the point of saturation I again raised my minimum rate and limited potential new clients.  And it was wildly successful in the short term – I developed an excellent client roster, much higher personal income, a few core staff, and more interesting, higher level issues to grapple with.

But I had made a big mistake.  I had forgotten the end game.

In this type of service business, the sale price of the business as a whole is generally calculated as 1 x earnings, in other words the annual gross revenue becomes the price of the business.  So if the gross revenue before expenses is $250,000, then the sale price is $250,000; if the gross revenue is $500,000, then the sale price is $500,000.

When I restructured my business, the choice I had made to offer a boutique service had led to consistent gross revenues and high profits.  The other choice would have led to much higher gross revenues and, though profitable enough, it would have meant more employees, less personal interaction with clients, and more management time spent in the business.  From the point of view of day to day living, I made the right choice.  From the point of view of eventual sale value of the business, my choice was dead wrong.  I could have easily doubled the sale price of my business had I been planning ahead.

The Take-Aways

I wanted to share this with you and mention these key take-aways that I hope you will consider:

  • We should be aware, even if just starting out, that there will be an end point, either through sale, liquidation, dissolution, or succession.
  • There is potential value in our business, beyond the day to day earnings.
  • We should always know how our business will be valued for sale or succession
  • We should keep our eye on building that value

Look ahead five, ten, twenty years.  Where will you be then?  What will the value of your business be?  What are you doing today to insure that value will be there?  The most valuable asset in your life may be right under your nose if you plan ahead.