Imagine having a business making £800k profit per year and losing it all, almost overnight.
That’s the story that popped up in my inbox today from a chap who specialises in helping people buy businesses on the cheap with no cash down.
He’d owned a very profitable call centre, which, thanks to a three-year contract with a large insurance firm, was generating £200k net per quarter.
Then the Global Financial Crisis hit, and he lost everything. The call centre went bust and he sold it for a pound.
The lesson he shared with his readers:
“Now is always the best time to sell your business (especially if you want to protect yourself against black swan events)”.
Half right. Well, the first half is sort of right provided one of three conditions exist. But I’ll come back to that.
Let me deal with the second half first. It sounds compelling, but it's misleading.
If he’d sold his business just before the crash for the 7-figure sum as he claims he could, what would he have done?
He'd have invested in another business or invested in the stock market.
What would have happened to those investments?
Yup, their value would have crashed too.
He would have got more than a quid, but his wealth would have plummeted, nevertheless.
Selling your business doesn’t protect you from future Black Swan Events.
They are, by definition, events that come as complete surprises – “they’re rare, hard to predict, and beyond the realm of normal expectations in history, science, finance, and technology”, says Wikipedia.
You can’t protect against them, but you can de-risk your business, so they don’t wipe you out. If you to do that for your business, get the ball rolling now by…
Still with me? Cool, so, what should he have done?
To be fair, selling the business at the start of the insurance company contract would have been a good idea – the call centre would have been attractive to a strategic buyer in the space – buyers love long-term contractually-bound recurring revenue streams.
But he didn’t.
Like most owners he kept the business and enjoyed the profits.
His mistake was relying on one customer for the bulk of his profits.
High customer concentration puts your whole business at risk – remove that income stream and the business usually plummets to a loss.
When you’ve a small number of customers making up the bulk of your revenue, it doesn’t take a Black Swan event to derail you – the customer changing their minds, finding a new or cheaper supplier, or a change of leadership can derail you. (I’ll share the story another day of a business who experienced this and the impact it had on them – painful – and how I helped them fix it).
If this fella had been building a sustainable business for a future sale, he’d have diversified the customer base, so no single customer accounted for more than 15% of turnover. His business wouldn’t have crashed and his investment would have been protected.
Right, that’s the Black Swan distraction dealt with. Now, let’s chat about the right time to sell…
There are only three conditions when “Now” is the right time to sell:
One: You believe your market is dying (for whatever reason), you can see no long-term future, but others can’t see what you can see.
I once recommended a business divested a division because of this – they got out for £347m. Five years later, the company that bought and rolled it into their business wound it up with the loss of 1,000 jobs just five years later.
Two: External factors affecting your market are creating the perfect storm and driving up valuations. For example: See my email about the owner who got lucky.
Three: You know exactly why you want to sell, have a compelling post-exit life plan, (your exit) and your business can be easily sold on the terms and for the amount needed to fund the next phase of your life.
It doesn’t take long to develop your Exit Strategy (if you know what you’re doing), but it does take at least a year to get your business to the point where it is easily sellable for the amount you need.
So, if you’re thinking of selling soon, or want to get your business ready so you can sell it at the best time for you, hit reply, tell me a bit about your business and what you want, and we can chat, or …
Arrange your chat with me here
Warmly
Richard
PS: The chat is free as I’ve no idea if I can help you until I know a bit more about your business. It’s not a “discovery” call, and it’s most definitely not a pick my brains call. If you’re serious about controlling your destiny by building a valuable and sellable business, we really should chat…