Whether you followed your gut and lunged headfirst into your business, or you wrote a business plan and raised some startup capital, getting into business is easier than getting out. Why? Because selling your business or having the balance sheet necessary to wind it down is a lot harder than it looks.
On a shoestring budget, anyone can start a small enterprise. You can skip the planning (not recommended at all) and just rent a location and fill it with inventory or hang out your sign and run some local newspaper ads. You can buy some tools and hand out flyers. You can set up an online store from your basement and spam the world. It doesn’t need to be expensive to get started, but that doesn’t mean it will be any easier to get out of that business, when the time arrives.
Alternatively, you can research to the nines, write an inspiring business plan and complete a complicated venture capital-funded equity deal for your mega startup. Getting out of a business like that won’t be easy either.
So why is it so easy to get into business, and so hard to get out? When you don’t run your business as if it is for sale, you end up with a financial model that may be sustainable, but not sellable
Imagine an auto repair shop that scrapes together enough money to get the equipment it needs to open up a location. There’s also leasehold improvements to pay for and enough working capital to finance the earnings losses that are likely in the early days. The next thing you know you are growing. But growth takes cash, so you leverage the assets you have accumulated to secure a line of credit from the bank, where you pay interest only, and maybe a small loan to set up an extra workstation. Nice.
Your business seems to be headed in the right direction, but by the time you pay your staff, yourself, the business taxes and debts repayments, there’s not likely to be a lot of cash leftover at the end of the year. You may be meeting your obligations, but it’s likely to get more and more difficult to get ahead. Competition is keeping your pricing in a limited range, and exponential growth doesn’t seem likely; certainly not without more financing. What do you do?
For many businesses, the only thing you can do is keep going. The reason is that you are making enough money to pay the interest on the debt, but not enough to pay off the debt. Your inventory is on your books at landed cost, but in reality, if you had to sell it in a hurry to wind down the business, you’d likely get much less than what you paid. The same goes for your assets which are being depreciated, but whose net value on your balance sheet are not be equal to the recovery value. Lastly, you may have positive retained earnings, from making several years of modest profits, but they’re not in cash - so it’s just a number on a sheet.
In light of the above, many small business’ balance sheets look better than they are in reality. This becomes painfully evident when you go to sell your business, and can’t find a buyer to value it the way you want them to. This becomes even more noticeable when you realize that selling all the assets won’t generate enough cash to pay off all the liabilities. So, you are stuck keeping the company because there is no way out.
The good news is, you can improve your options on how to exit in the future:
1. Plan your exit before you enter. Write a business plan that shows enough profit and growth potential to sell in the future at a premium.
2. Limit the debt you take on - this means all forms of debt such as vendor payables.
3. For the debt you do have (keeping in mind that not all debt is bad) make sure you have realistically valued and accessible assets against them.
4. Be skeptical of your own balance sheet. Your liabilities are probably valued to the “T,” but some of your assets may not be able to be liquidated at the value they appear on your balance sheet. Run some scenarios and work on closing that gap, such as slowly but surely reducing your liabilities.
5. Run your business as if it’s always for sale. Realigning your company’s asset base is not something you can do in a hurry, so start now and stay disciplined.
Getting out of business is supposed to be the highlight: the ultimate pay day. But it takes foresight, planning and discipline to make it happen.
Special to The Globe and Mail
Chris Griffiths is the Toronto-based director of fine tune consulting, a boutique management consulting practice. Over the past 20 years, he has started or acquired and sold seven businesses.
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