80/20 Sweet Spot Rule of Thumb:
If the owner IS the business, it’s worth nothing.
If the owner runs the business, it may be worth something.
If the owner cashes a check from his yacht, and the business is totally independent of him, then it is worth money.
Think back to when you first started your business. You were driven to create something out of passion or a particular talent. The vision probably included not only providing a good life for you and your family but probably also leaving some sort of legacy for your family, employees or community.
It is unlikely you even thought about your Exit Strategy; about focusing on growing the value of your business as well as making it saleable.
But you should have.
Maybe now you are one of the 6 million-plus baby-boomers who own a business and the thought of saleability is just beginning to loom.
Here are some sobering thoughts: [source: Exit Planning Institute]
One: 70-80% of all small businesses are not saleable for the terms and/or timeline the owner wants because it won’t pass the due diligence test. One of those tests is whether the business is dependent upon a single person or small group of people – lack of systematization.
No sophisticated buyer is going to even want to purchase a business like that.
Two: 80 to 90% of an owners financial wealth is locked up in their businesses.
Three: 63% of the business owners indicated they needed the income from the business to support their lifestyle.
Four: 56% of the business owners indicated they needed to harvest the value of their business to support their lifestyle post-transition
How devastating can these scenarios be to an owner who is planning on the sale of his business to fund his retirement?
How valuable would your business be if you had the following:
- Great customers who spend 4x’s, 16x’s and even 64x’s the average. Who are a joy to work with. Who refer others just like them. Who pay on time with no hassle. Who fit perfectly into your culture, values and Guiding Principles.
- Employees who are motivated and engaged.
- An offering or offerings that are unique enough to differentiate you from your competition.
- Teachable Processes & Systems – so that the success of your business is not dependent on any single person or team, most specifically, you the owner.
- Profitability and cash flow far above industry norms.
All of these things happen when you are operating from your 80/20 Sweet Spot and can all happen within a very short period of time.