It is a gorgeous day in Encinitas and I figured I might as well come down to the beach. There is a good beach there named Moonlight Beach wherein you can enjoy some views.
And so I was there enjoying the views when I thought of a valuable lesson that I want to share.
I want to share the most valuable decision that small business owners and new entrepreneurs can make when it comes to building their business.
Build your business into an asset
This is something I learned, thankfully, early on and incorporated it into everything that I did and it’s made a huge difference.
What I learned is to focus on building your business as an asset that you plan on selling from day one.
Almost every new entrepreneur I know, almost every business owner I know is focused on income. Everyone of them is focused on making income, and there’s nothing wrong with making income.
We should all be focused on making as much income as we possibly can. But you have to set aside an equal amount of time, energy, focus, and strategy for how you are going to create an asset out of your business that you can sell.
Because it doesn’t matter how much income you make the sale of your asset is ultimately going to be worth much, much more money. And the reality is almost everybody I know at some point or another wants to get out of their business.
Nobody that I know has decided to run their business for the rest of their lives.
So when or if you want to get out and you have not prepared the whole time to design that business as an asset that could eventually be sold it can be very, very hard to get out of that business.
But if from day one you focus on structuring the business as an asset that’s eventually going to be sold you can get the maximum value from that business. You can get out of it quickly and relatively painless versus what happens to a lot of people as they decided that they want to get out of it.
They realize that the price that they are going to get for their business is not nearly as big as they imagined. They have to spend years restructuring things to ultimately try to be able to sell their business again for the price that the wanted.
Oftentimes, as you can imagine, that never works out that way.
So if from day one you already have the idea that you eventually want to get out of your business you are better off because you have built a better business. Even if one day it turns out that you don’t want to sell your business you still got a better, healthier, and profitable business.
And the more profit you make, the more value of that asset increases over time.
So there is really no good reason or good argument why you should not focus on structuring your business as an asset the whole damn time.
How to build your business as an asset
What does it mean to build your business as an asset?
There are a couple of things you should consider.
One, you should be thinking about your business as something that somebody that does not have your expertise and knowledge about the specific industry will eventually have to take over and run.
That’s such a critical concept, right?
So many people start a business based on their expertise, their knowledge. They are like, “I’m an expert in doing X, Y, and Z, so I started a business in that.”
They started a business but never get to the point where they can separate their expertise from the actual product or deliverable that the business is delivering.
Which just means that you’ve just created a really high priced job for yourself.
Where maybe you are making more and you have more flexibility and more freedom than you did when you were doing this for somebody else.
But you’re still on the job because it relies on you 100%.
So think about the business owner or the investor who wants to buy your business eventually. Think of them as somebody with chunks of money that they’re willing to buy assets but not of those assets that require them to get a new job.
That’s not what they’re looking for. They’re not looking to buy a new job.
They want something that produces money in and sends that money to them every week or every month.
So that’s the most important thing to have, the mindset of that investor. You have to have that mentality instead of the hands-on entrepreneur.
Because then you’ll structure your services, product, packages, and other things like that in a way that other people can deliver them.
That is so critical.
Focus on processes and documenting
Next thing I would say is being really focused on the processes and documenting how you actually do things using automation wherever you can. Systems wherever you can to run your business.
Again, if I’m somebody who doesn’t know anything about this business, I want to have that confidence that I can walk in. There are systems and processes in place that will run without me having to invent that stuff myself.
In my first business, I literally have our entire team focus on documenting process every single day for every position. Ultimately we ended up with this big McDonald’s-like manual of how to run the business. It was encyclopedia-thick actually.
Luckily, you don’t have to do that anymore because businesses are run with automation and systems nowadays. It is much more process, systems, and documentation focused.
I know that doesn’t sound sexy, but it’s incredibly sexy when you get that check because your business is much more valuable.
Next thing that you should do is hire a good bookkeeper from day one. Again this is something many entrepreneurs struggle with.
If I’m somebody who’s looking to buy your business. I walk in your door then you tell me that your business is doing $2 million in sales and it’s profitable. What I would do is look at your books and then I saw that you are not following GAAP (Generally Accepted Accounting Principle). Your books are all over the place.
Well, now the numbers that you told me are meaningless. I’m assuming you’re inflating them. I’m assuming you don’t really even know your numbers that well.
Now, the price I am willing to pay for the business just went way down because I just got a lot more perceived risk in thinking about your business.
I don’t think the books and numbers that I’m looking at are really anything like you say they are. So you got to have a really good bookkeeper.
You’ve got to have good clean books following GAAP.
Otherwise, all you’re doing is shooting yourself in the ass. If you expect anybody to buy your business for a healthy chunk of money. Nobody in their right mind is going to do that.
In fact, I bought a couple of businesses when I was running my first company and I was able to get them for a steal.
After those entrepreneurs had worked for 10-15 years to build these businesses, I got them for almost nothing out of pocket because they had kept their terrible records. They were trying to avoid taxes as much as they could when they declare income.
So they completely botched their recordkeeping because they were And so they completely botched their recordkeeping because they were just focused on that short term income when in reality what they were doing was absolutely robbing from their own pocket and the longterm value of the business.
So you’ve got to keep good books.
Focus on building your business into an asset from day one
Think of your business as if somebody who does not know the business, industry, or does not have your expertise. It’s ultimately going to be the one writing a check for it.
Design your products and services around it. Build your systems and processes around that mentality and keep really good books knowing that you’re going to have to give somebody the highest level of confidence that what you’re saying about your business is true.
If you operate like that from day one, you’re building an asset. And when you sell that asset, it’s going to be for many times the income that you were making at your business.
That’s the way it works.
You’re going to realize that that is what all of that hard work was all about.
If you don’t put that thought into it from day one, if you don’t treat your business as an asset and you end up not being able to sell the business or not be able to sell it for the price you have in your mind, you are going to be really upset with yourself.
Focus on building the asset from day one.
I hope that helps you.