What are the keys to successfully starting and selling a business? originally appeared on Quora - the knowledge sharing network where compelling questions are answered by people with unique insights.
Answer by Peter Baskerville, started and managed over 30 small-to-medium businesses in retail and hospitality, on Quora:
I have started many brick and 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. While my experience is with brick and mortar businesses, I'm sure that many of these insights will be appropriate in the online environment as well.
I define a successful business as one that is financially sustainable, in that its revenue is demonstrably maintained at a level that covers all the expenses required to generate this revenue plus provide a financial return on investment to the owner(s) and 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 is selling a solution matched perfectly to a clearly defined problem that is experienced by a financially sustainable market. You must also develop a proven business model that can be executed by a capable team who have access to appropriate key resources.
The opportunity that will be the basis of your startup and that 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 give 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 in three key areas: operating a 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 to a successful business startup is to be able to credibly demonstrate answers to the following questions:
- Have you found a problem that enough people want you to solve?
- Does your solution (product) solve this problem in a compelling way?
- Does the value proposition (benefits) match the expectations of the customer segment that you plan to attract as your primary customer?
Successfully Selling a Business
As far as successfully selling a business goes, you need to first establish who your target buyer is going to be and then consider the key requirements to successfully sell 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 will usually require you to agree to leaving a certain percentage of your equity in the business, to be repaid later via a payment plan. Key: be a very keen seller. You must believe that the buyer is trustworthy and capable of making the agreed-upon payments.
- Selling to an external party wanting to enter the industry. This person 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 the typical buyer, particularly in the retail and hospitality industry, but be prepared to justify your profits and to be pressured on a price based upon 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 to validate your stated turnover.
- Selling to a competitor who is looking purely at what your business represents in terms of market expansion and market share. This is a hard-nosed sale negotiation. These buyers want to buy cheap because they can do what you have already done, but would prefer to do it the easiest way, which is acquisition of your business. Key: this has nothing 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 or a similar market and who sees how your business offers them an important strategic fit in the market. These buyers are rare indeed, but they will provide 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 from competitors (i.e. niche customers, unique product features or benefits, and strong or unique strategic alliances).
- Selling to the public via an initial public offering (IPO), which allows the business to become a publicly listed company on the stock exchange. This is the most difficult sale of all to make, but it will yield the highest price for your equity in the business. Key: develop a sizable 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 sizable 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.
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