Are you hoping to turn your small business into your retirement? Then you should know how to build goodwill! Goodwill is the amount of money someone will pay you for your business, over and above the value of the assets. It’s a big imaginary number that represents how well you run your business, and how safe a purchaser thinks your business is to buy.
Take the podium I sometimes use during my seminars; anyone can buy one for around $250. However, I use it to generate revenue by teaching behind it, with great content and a characteristic style. Over time, the value of that podium increases as you see how it becomes an instrument for financial success. I spin financial analysis into tales of encouragement and caution, while giving business owners tools to secure their own success. By the end of a 1 day seminar, I value that podium at $4,000.
I’m exaggerating, of course. But why would anyone pay you more than the value of your plant, property, and equipment for your business? For instance, when I built a restaurant, I found an empty space and filled it with all of the equipment needed to prepare and serve food and drinks. I added some marketing to a brand I created, hired staff, and opened the doors. I was in business for the actual cost of buying the resources to set-up a restaurant. I didn’t do that with the other two restaurants I owned. I bought them already set-up and operating.
The answer is simple. People like to buy businesses where the kinks have already been worked out and they are generating cash flow. They are safer, with a more “guaranteed” return on investment. Also, they pay more for this type of business. When you create a business that operates with great processes, people, and products at a profit. People see the potential. Buyers reward the current operator for their previous hard work in the form of goodwill.
The difference is clear. The amount of work it takes to build a new business from scratch, with no guarantee of success, can be overwhelming for some. Show a potential buyer a business with history, brand recognition, solid employees and processes, operating at a profit, and their wallets light up. A “plug and play” type of business doesn’t last long on the market because people can see the results happening in front of them. They envision themselves at the helm, calling the shots, cashing the checks.
From your perspective, you get to double dip on the reward. First, you get the benefit of operating a healthy business that is generating cash on a monthly basis. Then, once you sell, the buyer rewards your operational prowess with goodwill as compensation for your hard work. It’s like you’re getting paid twice on the same business.
So if you intend on retiring from your small business, you need to plant a pot of gold at the end of the rainbow for yourself. Start by understanding your value proposition and why people should buy from you. Market that message to your audience to bring them into your business and build your brand. Invest in processes and great people to perform them, to ensure customer success. Then collect the profit you generate from your business.
Nothing attracts the money of a potential buyer than the potential of more money. Look at your business with a fresh eye and determine if you would pay a premium to do your job. If the answer is no, then focus on making it more attractive. Today is a better day to find that out than at the closing table a day before retirement. You goal isn’t to sell the equipment it takes to run your business. The goal is to show a prospective buyer that the things your staff does with that equipment is worth paying more.