Last week after grilling a few great steaks I’d pick up at Schott’s Meat Market in Helotes along with a bit of my wife’s award-winning potato salad and a few sautéed veggies, all washed down with a glass or two of Shiner Bock, a few buddies and I sat down to a little friendly game of five-card draw; our favorite version being “jacks-or-better” to open.

Later, I started thinking about what a good poker hand had in common with a good business.

What “Jacks or Better to Open” refers to is a version of five-card draw; one of the most popular poker games. Specifically, a player can’t place an opening bet, let alone draw more cards and potentially win the pot, unless he or she has a hand with, at minimum, a pair of jacks. Without going into too much detail, no player at the table can start betting unless they have been dealt—at the very least—a pair of jacks or better.

                                             So, you may be asking, what has this got to do with selling my business?

Simple… if your business is not ready to bet on, in other words, for you to put money in the pot and invite the other players to pay to see what you’ve got, you’re not prepared to sell your business for a realistic price. Or, to put it another way, you shouldn’t attempt to sell your business until you are holding a strong hand with a reasonable chance for success.

What might be considered “Jacks or Better” in a small business?

Profitability, for starters. Is your business making a profit, regardless of what you do with that profit at the end of the year to avoid giving too much to the tax man. Many businesses use profit for re-investment in the company or to pay year-end bonuses to key owners and employees; both of which are legitimate and an important use of profit for tax purposes. But first there must be profit with which to make these options possible. Operating a business at a loss, just breaking-even or showing little profit on declining revenue is not “Jacks or Better” in the poker game of selling a business.

Sustainability, not necessarily in the environmental sense, rather… will your business continue on, assuming responsible stewardship, after you have departed the scene. This is a good card to hold; probably a face card.

Expandability, to coin a term. Is your business “expandable” in the sense that it can be grown to generate more revenue for the new owner. If so, how? This is where a well-written Business Plan is like having another face card in your “Jacks-or Better” poker hand.

A good Ratio of Customers to Revenue means your business is less vulnerable to the loss of a customer or account. Unfortunately, many owners of small service or “job-shop” type enterprises find themselves with four or five customers generating eighty or ninety percent of annual revenue. Lose one key customer—regardless of the reason—and twenty or twenty-five percent of revenue may disappear. Further, most banks, and the SBA especially, are reluctant to fund a buyer if any one customer accounts for more than ten to fifteen percent of annual revenue! If this is the case, it may be time to draw another card to fill in that “Jacks-or-Better” poker hand.

Solid Financial Documentation that presents a clear and unambiguous record of the financial history of your business. To continue the metaphor… no one else at the poker table would respect a player who simply thew down a disorganized jumble of cards in no particular order, some face-up, others face-down and said “there’s a winning hand in there somewhere”. That is what potential buyers see when the standard financial documents: Income Statement, Profit & Loss, Balance Sheet and tax returns are incomplete, disorganized or missing.

Playing two different games with one hand means you will probably lose both. Running expenses from another business or non-business-related-activities is like busting up a pair of kings from your potentially winning “Jacks-or-Better” poker hand to fill in a game of gin rummy you’re playing on the side. This is another very common mistake. While it is often considered “good business” to avoid or offset potential taxes and may work to your advantage in the short-term, it may have a negative impact on the profitability of the business you want to sell. Lower profit results in lower business value. As an example, about eighteen months ago we advised a small business owner to “clean up his act” in this regard and the result was a doubling of the value of his business in just over a year.

A winning hand is the payoff—literally—for a successful game of poker and… for the successful and rewarding sale of your business. Legacy Assets 360 can help you find those “Jacks-or Better” in your business to put together a winning hand.