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Tips and Articles for Entrepreneurs: Selling or Buying

Cut Free Your 'Sinkers'​ Before You Sell

So you're thinking of eventually selling your business. Maybe you've built a manufacturing business with several product lines and you service a multitude of industries. While innovation and diversification is essential while you're growing your business, it might be the opposite when you sell it, so you may consider working strategically with lines-of-businesses to optimize your value.

When is it better to cut-and-run? Can I sell a spin-off business separately?

Resources. How much dedicated resource is this line of business consuming? If creating a new line of lids on a run that mainly produces your bases, the incremental 10% adjustment to the same machine using the same materials, might not be worth pulling the plug. But if you have dedicated equipment, staff, and marketing invested in this, you'll have to prove the ROI of that to a buyer. If it doesn't pencil out, it might be better to split it off or cut it free before you sell.

Development phase. If you build awnings, but are developing a new cover that you've built for the outdoor team sports market, how far are you from seeing a return? If you're encouraged by the sales so far, then you might describe the opportunity to the buyer as being "almost there", but keep in mind that they will want to see proof of sales. If you don't have sales, many buyers see it as just an idea and maybe even a time/resource sink.

Strategic value. Lines of business can be sold off separately, but the books need to coincide. This is different than "cooking the books" which is to falsify information. Rather, you are organizing information into meaningful entities that are truly self-sustaining and quantifiable. You may find a strategic buyer for a particular line of business. Ask these questions when you consider peeling off certain aspects of the business:

  1. Could this spin-off operate independently without support from the Mothership? Coming back to our 'lid and base' example, you probably could not spin off the lid business because it depends heavily on the existing equipment, materials, and labor already producing the bases. If the incremental resources required are over 40%, it is not likely to have a lot of value to buyer separately unless the buyer has that equipment, etc.

  2. Is there a meaningful allocation of resources I can supply to the buyer? The main question a buyer will have is 'how much effort and resource will this spin-off take? This will require some accounting allocations and acrobatics. You will have to do a fully-allocated analysis with your accountant so that the % of the building, labor, equipment, etc is all factored into the cost. Then, the buyer will have to decide whether those resources exist in their business or if they'll need to acquire them. If they need to acquire them, you'll discuss the cost to buy those resources and the initial and long-term utilization rate based on sales forecasts.

As you get ready to sell, consider using lines-of-business to help strengthen the value by dropping the weight before it sinks or drive the value up by spinning it off into a separate entities (and lean on your accountant to do a great job with the books).

You might try to sell the whole business at first and then offer to spin off or cut certain lines as the buyer reflects their value on the company. The payoff could be well worth it.

Kris FuehrComment