This post originally appeared on Quora: What are the keys to successfully starting and selling a business?
I have started many bricks’n mortar retail and hospitality businesses, that I subsequently went on to sell. The pitfalls I encountered in my early business sales, I fixed up in the later ones, which gave me some insights on how to start and sell a business successfully.
Now I understand that the question will attract answers from people who have started and sold online businesses as well, but here are the key insights that I discovered from bricks’n mortar businesses. I’m sure that many of these insights will be appropriate in the online environment as well.
This question is extensive in its reach so I will attempt to answer it via a very narrow but concise scope. In this answer I will define a successful business as one that is financially sustainable, in that, it’s revenue is demonstrably maintained at a level that covers all the expenses required to generate this revenue plus provides a financial return on investment to the owners/shareholders at a level that ensures their ongoing commitment and support of the business.
STARTING A SUCCESSFUL BUSINESS
The first key to starting a successful business is to find your opportunity, which will be selling a solution matched perfectly to a clearly defined problem that is experienced by a financially sustainable market. You will also have developed a proven business model that can be executed by a capable team who have access to appropriate key resources.
This opportunity that will be the basis of your startup and which will lead to a financially sustainable business, will have the following key characteristics:
- A fertile environment – that is either growing fast or is changing significantly and for which you have previously secured insightful market intelligence usually via your work in the industry.
- Access to critical resources – that gives you an unfair advantage relative to your competitors. The resources you have access to will be unique to you, rare and expensive for others to copy, even if they understand them
- Appropriate experience – where either you or a member of the founding team has extensive experience in all three key domains: operating small to medium business, technical experience in the chosen domain and entrepreneurial experience in profitably establishing new enterprises.
- A perfect personal fit – in regard to the timing of the opportunity for you and the fit with your personality and passion, giving you a sense that you were ‘meant’ to do this.
The key ingredients then to a successful business startup is to be able to credibly demonstrate answers to the following questions:
- Have I found a problem that enough people want you to solve?
- Does my solution (product) solve this problem in a compelling way?
- Does the value proposition (benefits) match the expectations of the customer segment that I plan to attract as my primary customer?
SUCCESSFULLY SELLING A BUSINESS
As far as successfully selling a business goes, you need to first establish who your target seller is going to be and then consider the key requirement to successfully sell them the business. These could be:
- Selling to your partner or management who raise sufficient funds to make you want to exit the business. It’s the easiest sale to make because the business being sold is already understood but generally you will sell it at a less than optimum price and which usually requires you to agree to leaving a certain % of your equity in the business and being repaid via a payment plan. KEY: be a very keen seller who believes that the buyer is trustworthy and capable of making the agreed payments.
- Selling to an external party wanting to enter the industry who will typically be looking at the proven profitability of the business in order to establish a capital value and then comparing that figure to your asking price. This is a typical buyer, particularly in the retail and hospitality industry, but be prepared to justify your profit and be pressured on a price based on that justification. KEY: Have audited or accountant verified tax returns that support your business valuation and be prepared to allow the new owners a trial period that validates your stated turnover.
- Selling to a competitor who is looking purely at what your business represents to them in terms of market expansion and market share. This is a hard nosed sale negotiation. This buyer wants cheap because they can do what you have done but they would prefer to do it the easiest way via and acquisition of your business. KEY: nothing here to do with you, just be in the right place at the right time and don’t be too greedy in your asking price.
- Selling to a strategic buyer who is already operating in the same/similar market and who sees how your business offers them a important strategic fit in the market. A rare buyer indeed but provides a high probability of you securing your asking price because they value your business at a far greater price than what the ROI analysis identifies. KEY: Develop parts of your concept in a way that differentiates your business in relation to competitors (i.e. niche customers, unique product features/benefits, strong/unique strategic alliances)
- Selling to the public via an Initial Public Offer (IPO) that allows the business to become a publicly listed company on the stock exchange. This is the most difficult sale of all to make but which will yield the highest price for your equity in the business. KEY: Develop a sizeable business that can demonstrate sufficient growth potential that a merchant bank or venture capitalist believes can be sold at a profit big enough to cover their own sizeable fees and expectations. Be prepared to be tied to the new business structure for a period of time after the sale and to have your payout tied to the performance success of the new entity.
Peter Baskerville is a a teacher and educational resource developer at TAFE, Queensland Brisbane. He has started, managed and sold over 30 ‘bricks & mortar outlets’ in retail and hospitality. Peter is also a Quora contributor. You can follow Quora on Twitter, Facebook, and Google+.