I guess everyone’s first reaction would be, “well, not today,” because we have just gone through COVID 19, and in most cases, this year’s figures are distorted. The question we need to ask ourselves is what is the future of our business? If we wanted to sell it today, could we? Would we even want to? And of course, what is it worth? And finally, do we even have a business to sell, or have we just created a place where we go to work and earn a paycheck?
I think asking ourselves this question today is truly relevant because of what we have been through. We’ve seen lockdowns, enormous restrictions, and massive changes of behaviour, that we have all needed to incorporate into our daily lives. The truth is we have been incredibly fortunate in Australia compared to other places in the world.
Before I drill down into some underlying factors which a potential buyer will be wanting to know, I want to touch on an alternative solution. I discussed this with several colleagues who were asking me this very question, about selling a business.
In the diamond and jewellery business, continuity normally means bringing someone in from the family to continue the enterprise. I challenge this concept today, because I do not believe it is the best approach, unless a family member has shown great skills, or brings in skills that you do not have. A good example is a son of a colleague, who introduced CA into the workshop, another who implemented a CRM and another who went overseas to work for a large retailer, had the opportunity to work for other people, in other businesses, and brought home fresh ideas and knowledge.
Bringing in a family member into the business because of obligation, or because that is what your father did means you might be setting them up for failure. Why? Simply put, over the many years that you have built this business, you have learned from your mistakes. Our children can be passive observers, but so many of the nuances that you had to go through personally are no different to them watching a movie — it is forgotten the moment it is over. Handing a business over to your children, who may not have the skills to manage other people (which is, without doubt, the biggest skill and learning curve) is unwise as, unwittingly, you are putting an obligation on them before they have had the chance to learn the skills required.
You can work out why this is the case, and I could write an entire article about what you need to do to prepare them for such a transition. The bottom line is, you could destroy your relationship with them and the equity that you have built up over the years, leaving you and your family members with no legacy and no money.
An interesting alternative is to contemplate hiring an experienced general manager. This has enormous benefits and possibilities for both the longevity of the family business, and the potential to sell the business at some point in the future.
Let us be honest. What is the biggest problem of the family business? It is that you are the business.
Over the years, you have built up relationships and connections which have inevitably developed trust and credibility, all fundamental foundations for any business. Have you been able to impart your knowledge, and that little bit of secret sauce that makes your business a little different to your children and/or your team? If you were to contemplate employing a general manager, it would force you to put systems and structures in place that never existed previously. This would make you contemplate things that you do, that you take for granted, that no one in the business really understands, or even how to do them.
The exciting prospect of going down this path is that, after six to twelve months, it can give you the ability to do what everyone told you should do but that you never had the time for : “work on the business and not in the business”. You will suddenly have time to look around you and contemplate what you need to do for your business to succeed into the future. Best of all, you might have time to take a day or two off per week, and still have money coming in. If your intentions are to bring in family members, you will be in a far stronger position in understanding what skills they will require to take over the business. If you decide to sell the business, it’s a strong story to sell, and would increase the sale price dramatically.
So let us analyse, what are some of the key factors that you need to consider if you wanted to sell your business today? The same factors need to be considered whether this game plan is to be executed now or in a few years from now.
I’m focusing on our industry, and not the tech industry, which just contemplates growth. If someone is going to buy your business today, they are looking for three to five years of financials which show whether you are profitable. Your accountant can tell you what the key metrics are and what is a reasonable return on investment. A lot of small businesses run a very lean balance sheet as they are constantly pulling money out of business to finance their lifestyle. You need to be transparent because no one buys the business based on what you might be doing on the side. If you can show that there is a lot of untapped potential in your business, maybe because of its location, this needs to be highlighted in your offering.
A big fish in a small pond
Over the years, you may have built a great reputation and now be seen as the number one jeweller in your area. This is a competitive advantage and, even taking the internet and online shopping into consideration, has value. However, if the value is purely you, then you have a problem.
We all know that if you had to liquidate your stock tomorrow, you are probably, going to get $0.25 in the dollar. Selling a business with all the stock could be the way for you to recoup the years of accumulated gold, gemstones, and merchandise in the store. One thing is for sure, you need to have immaculate records, and if you do this, you could increase the value of your business as you are showing that key elements of your business are systemised.
Following up from my last comment, accurate records, financial statements, asset inventories all reflect professionalism. Ask yourself, if you were to buy a business, if all the stock were accurately recorded, perhaps, with a photo of each item, how impressed you would be?
If you can show that your business has month on month, year on year, had a consistent revenue stream and reasonable profitability, then whoever is going to buy your business has a much higher degree of confidence in what they are investing in. Hands down, this is what will make or break the sale.
It all sounds simple, doesn’t it? If it were that easy everyone would do it. Switch hats: pretend you are the buyer and you want to uncover all the problems or the potential problems. Come up with a price that leaves a little bit of money on the table, for the seller, but allows you to get your initial investment back as quickly as possible. Ask your friends and colleagues to be devil’s advocate. You need to be supercritical of your business. By taking this perspective, you can start to build the plan on how to fix what is essential, have answers to possible weaknesses or problems and look to understand the process on how businesses are actually sold.
At some point in time, we must all make changes, the question we need to ask ourselves is:
“Are you going to be the one directing the show, or are you just going to look up from the counters one day and say it’s time to close the doors?”
I truly believe that so many small to medium-sized diamond jewellery businesses can make small and gradual changes to become businesses of the future. Whether or not you bring in a family member or hire a general manager, each comes with its own challenges, but forcing yourself to confront the hard questions will eliminate you finding yourself being forced to confront uncomfortable and inevitable decisions in the future.
President, Diamond Dealers Club of Australia