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The importance of building your business as if you plan on selling it

26 February 2024 FNB

Entrepreneurs embark on business ventures for many different reasons, but usually they are driven by passion, innovation, or the pursuit of independence.

Very few business owners set out on their ventures with the idea that they want to sell their enterprise down the line. But structuring and managing your business as if you plan to sell it, preferably right from the first day, can lay the solid foundations you need for long-term success.

Michelle Geraghty, Business Development Director at FNB, emphasises the value of this ‘build it as if you want to sell it’ approach. She offers the following suggestions on setting up and running your business as if you plan on selling it:

Have an investor perspective – Geraghty advises entrepreneurs to always look at their businesses the way a prospective investor would. “This ensures that you prioritise long-term value over short-term gains,” she explains, “because investors look for businesses that show strong potential for sustainable growth, have clear financial projections, and maintain integrity in their operations.” To ensure your business remains appealing to potential investors, it's crucial to keep it in a constant state of readiness, which Geraghty says should involve regular audits and keeping meticulous financial records.

Choose the right structure - While starting as a sole proprietor might be simpler, and cost effective, it’s beneficial to set up a proper legal structure for your business as soon as possible. A Pty Ltd, for instance, may have more stringent regulatory and tax obligations, but it also lends credibility and can facilitate easier transactions when selling the business.

Keep your personal money matters separate – Many entrepreneurs start out running their business finances through their personal bank account. This may seem like an easy and cost-effective option, but it can create numerous problems when the business begins to grow, and the financial matters need to be separated. Geraghty says that having a dedicated business account at the outset not only makes it easier to understand the financial health of your business, it also helps avoid tax complications and simplifies the process of applying for credit or funding when required.

Build a strong business and valuable brand – Geraghty emphasises that the main focus of your business-building efforts should be on ensuring that it excels in its market. This means focusing on developing a quality product or service, establishing a strong customer base, and creating efficient operational processes. A well-built business naturally attracts potential buyers and is easier to sell at a premium price because it demonstrates proven success and profitability.

Try not to be your business - Potential buyers want to know that the business can continue to thrive, even if the original owner isn’t at the helm. “To achieve this, you need to develop a strong leadership team and ensure that operational knowledge is shared and not held by any single individual,” Geraghty says, “and you also need to have a clear succession plan, and possibly even a second-in-command who is capable of steering the ship in your absence.”

Work on your business, not just in it - Allocating time to work on your business strategy is as important as working within it. “You’re likely to be extremely busy, especially in the early days after starting up, but you need to deliberately make time to step away from the daily responsibilities and invest in planning and strategising,” Geraghty says. The right plan forces you to build your business correctly to achieve the outcomes you have clearly set. But remember that planning is a dynamic process. You need to regularly review your business plan and ensure it is still driving your company towards the goal you have set.

If you do want to sell, be realistic about the price - Emotions can often inflate a business owner’s perception of their company’s value. Understanding the concept of EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortisation) multiples and how they apply to your business can provide a more realistic picture. It’s essential to grasp that the valuation will be based on concrete factors like net profits, customer sources, diversification of revenue streams, and the strength of your online presence.

Leverage your resources; especially your bank - A bank is much more than just a place to manage funds; it can, and should, be a valuable strategic partner to your business. It’s also a vault of useful information, resources, and experienced professionals. “Utilise these resources and advice that banks can offer, especially when it comes to preparing your business for sale. They can provide guidance on valuation, connect you with potential buyers, and offer advice on getting the best possible terms for your sale.

"Thinking about selling your business isn't just about the endgame; it's about building a robust operation from the get-go,” Geraghty says, “even if a sale isn't on your immediate horizon, or your long-term one for that matter, taking this approach fosters efficiency and positions you to leverage your enterprise to unlock the many opportunities you will encounter on your entrepreneurial journey."

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