Build a business someone would buy

Norm Brodsky built and sold several companies. In his Inc. columns he gives advice that sounds like a contradiction: run your business as if you will keep it forever, and build it so that someone would want to buy it. He says skipping shortcuts and running his records-storage company for the long term is what made it worth more when he did sell, and in a later column he argues for building to sell even if you never intend to. The book he wrote with Bo Burlingham, Street Smarts, adds the buyer’s side: a buyer pays for the business’s power to make money in the future, so the riskier that future looks, the less they pay, and a business with weak margins is hard to sell at all. (See idea 14 on our Street Smarts page.)

The two ideas fit together. The things a buyer checks are the same things that make a business safe to own. This article goes through them, with hypothetical numbers.

How a buyer looks at a business

Buyers and investors value a small business in different ways, and real prices depend on the industry, the buyer and the times. A simple way to see the logic is to think of the price as some number of years of profit. The number of years is lower when the profit looks less certain. The multiples below are made up purely to show the arithmetic; they are not market figures.

Everything that follows is about what makes profit look steady or risky to someone who doesn’t know your business.

1. Margins that hold up

The book’s advice is to keep margins strong, including by raising prices gradually as costs creep up, rather than letting margins slowly erode and then needing a big, painful increase. Brodsky’s Inc. columns also stress that gross margin is the key number.

A small, regular increase protected the rupee gross profit. Waiting several years and then raising prices sharply is harder to get past customers.

2. Many customers, from more than one place

A buyer will ask what share of sales your biggest customers make up, and whether they all come from one industry. Brodsky wrote that his own company was valued lower because most of its customers came from one industry. See One big customer: the supplier-to-OEM trap.

3. A business that runs without you

The book makes the point that being the boss doesn’t mean doing every job yourself; delegate the work and do what you do best. A buyer is buying the business, not you. If every big customer calls you, every price is decided by you and every supplier deals only with you, the buyer has to replace you, and that cost comes off the price.

This also works the other way. A business where a trained team handles sales, buying and collections is easier to own: you can fall ill or take a holiday without it stalling.

4. Numbers you can show

Brodsky’s columns keep returning to knowing your numbers: sales and gross margin by product and customer, collection days, the current ratio and a weekly key number (ideas 5, 6 and 8). In India, a buyer or lender will also want to see books that match your GST returns, income-tax returns and bank statements. Clean, consistent records are a precondition for any serious offer.

5. Collections and stock under control

A buyer will look at how old your dues are and how much stock is slow-moving. Old dues and dead stock both get written down in a buyer’s mind. See Cash before profit.

6. A culture that holds when you are not there

Brodsky treats culture as the one thing the owner cannot delegate (idea 13). For a buyer, a team that treats customers well and watches costs without being told is part of what keeps the profit steady after you leave.

What this means at each level

• Traders. A distributor (1.3) or super stockist (1.4) depends on the companies it distributes for. Spread across more than one principal where you can, and keep collection days low.
• Dealers. A multi-outlet group (2.4) or master franchisee (2.5) usually needs the brand’s approval for a change of owner; read your agreements early. Workshop and spares income that does not depend on new-vehicle sales tends to be steadier. See dealership ROI.
• Manufacturers. Spread across customers and industries, keep tooling and quality records in order, and move towards products you control, up to own brand (3.5).
• New products and services. A product company (4.3) is often valued on future potential, but the same questions apply: are margins real, is revenue spread, and does the business depend on one founder? See investment math.

A simple test

Once a year, imagine a serious buyer is visiting next month. Write down:

1. Your gross margin for each of the last three years. Is it steady?
2. The share of sales from your biggest customer and your biggest three.
3. Which jobs only you can do.
4. Your dues by age, and any stock older than six months.
5. Whether your books, GST returns and bank statements match.

Fix the worst item first. You may never sell, but you will own a safer business.

The ideas are Norm Brodsky and Bo Burlingham's, from Street Smarts and Brodsky's Inc. columns, including "Secrets of a $110 Million Man" and "Build to Sell (Even If You Don't Plan on It)". The explanation and the examples are ours.