How can the size of your business impact a future sale?

Where does your business fit?

• Under $1,000,000 in sales
• $1-3,000,000 in sales
• $3-10,000,000 In sales
• $10,000,000 Plus in sales

This area has a major impact on a number of ways the business will sell or not sell. The smaller the business then the more it will rely on the owner operator to succeed, its difficult to generalize on how to measure the size of the businesses, one business may be doing 10 million in sales but have a very low gross margin and small staff and it may be similar to another business that has a much smaller turnover higher gross margin and a similar number of staff. In my opinion the most consistent way to compare one business size to another is look at the gross margin and compare that way. I look at a combination of gross margin and number of employees to do comparisons especially when they are in different industries.

In the categories I have focused on the small to medium range of businesses by packaging all other businesses in the $10m+ range that is also quite broad.
Here are the approximate sizes and differences:Under $1m in sales These businesses are usually operating with less than 5 employees depending on if they are product based or service based businesses. This is the highest risk area as the owner is more critical to the success of the business so if you have a business that fits in this category my suggestion is that you spend the time to create work instructions for all of the parts of the operation that you as the owner are involved in as it will give the business much more value. You also should expect that with a pending sale at a future date you will be required to assist a new owner for a longer time in the hand over period os there is so much you will do that is in your head that is now running on auto pilot.

$1m-$3m In sales This will be a larger business with more employees so if the owner is working 5 or more days per week then his impact on the total staff as a percentage will be less that a smaller company. The number of staff in a company this size will generally be from 5 to 20 depending again on the type of business it is.For this size business to operate and grow if needs more systems in order to delegate to other staff and as a result it will usually have more stability than a smaller business. The next thing to measure is the levels of management most companies will have a 1 to 7-10 ratio of manager to employee so when other managers are brought in then it puts the pressure on the owner to learn to grown the company through others and this brings a new set of skills.

$3m-$10mMoving up again in size then combined with the number of staff that will generally be under 50 and with this size company there may be 2 levels of management again the more levels of management then the more stable the business is generally speaking. This also means that the systems in place will require by default to be much more advanced than the smaller size companies, this is where cash flow, forecasting and a more professional level of management is required.
$10m+This is either a larger small business or a small large business and the number of employees will exceed 40 in most cases. again how many levels of management and what will be the manager to subordinate ratio? Systems that worked when the business was half the size will be outgrown and need revamping and professional management will be critical.

For the business owner planning on an exit at some point its good to be aware of the risk factors for a buyer, if there are 4 managers and 1 in 4 will leave then the risk will be lower than if 4 of 4 will exit the business after a sale, so to compensate for a degree of information that is in peoples head then great systems will make a sale easier and give the business more value to a potential buyer. Later we will discuss the meaning of great systems.

If you are in a retail business some of the key processes relate to the number of locations you have and the leases in place will be an important factor, with any potential for an extension beyond the end of the lease, some questions need to be answered. Do you have any locations that are not profitable presuming you have multiple locations? are there any traffic (customer) changes that have or may impact the sales of the business? Your purchases will be a key factor also, so do you have any suppliers that provide more than 30% of total purchases? How have your yearly markdowns changed over the past years? along with sales increasing or decreasing this will impact your margin if your buying is off pace. How do you keep track of stock turns and have they changed year on year in a positive way or a negative way?

If you are in the wholesale/distribution business then your salespeople will be an important issue for a potential buyer, what is the staff turnover for salespeople? do you have a sales system? a marketing system? a lead generation system? do you have a commission structure? are all these aspects clear in writing as a business process? Obviously you need to sell something do you have products that have some unique I.P. ? or are you selling in a region? if so what rights do you have and is there exclusivity on products? what are your distribution costs? do you have freight agreements in place and are they well documented?

Service Business, again sales, leads are an important factor so ensure these are well documented and repeatable. After you sell the service do you have a system in place to ensure the standard of installation is done correctly? what is your follow up process? how do you ensure that you have charged correctly? was a quote involved? were there add ons? are all these processes in writing for someone to follow? An example may be that you have a pool service company and your serviceman are out servicing 10 or 20 pools so do you have a system in place to ensure that all the services are being billed and that do don’t miss any? or are there add ons and you have supplied chemicals are they all charged out and what is the process to check back with the materials and labour management to ensure that you did not forget to invoice something? many service companies will have holes in their systems how is your business being prepared for sale and how much value can you increase by checking off our list and taking the time to prepare correctly.

Manufacturing. there are 2 types of manufacturers subcontract manufacturers and OEM (Own Exclusive Markings) and you could be a combination of both. So you are making products then you are assembling and or machining parts or both, in this area its imperative to have work instructions so that any existing or new employee can follow the instructions to ensure the process is make the same way with the correct quality controls in place. Is there rework in your process ? if so why? Any potential purchaser will be assessing the risk factor in all parts of the business so your job in preparation is to ensure that you focus on as many of the main areas as possible in your preparation process.

Find out how you can use this information to make your business more attractive to potential buyers in future posts! or contact us for more information.