When should I sell my business?
Selling your business is the most important financial transition of your life. For a very few of us who were born with great wealth, are successful serial entrepreneurs, or who hit the lottery that may not be true; but for 95% of us there will only be one exit from the company you built. The years of effort have hopefully paid well as you went along, but most of us are planning a good portion of our retirement around the proceeds from selling the business.
Selling is much more than a transaction. It is the process of making your company presentable, desirable, marketable and financeable. It’s knowing who your buyer is and how much he or she can pay. It is understanding what is valuable in your company, and what isn’t. Selling your business starts with the decision to sell…someday. From that point on, you should be preparing for the transaction phase, but the transaction phase is the end game, not the whole game.
The best time to sell your business is when you don’t have to. Many business owners are reluctant to sell in good times because they are making a lot of money, and won’t sell in bad times because they can’t get the full value. The best time to sell any business is when you want to. If you have made the business attractive to the right buyer; that time can be any time you choose.
Remember; every business owner will exit his or her company sooner or later. It’s up to you whether you want it to be on your terms, or on someone else’s.
Exiting your business
Let’s first be objective about your future exit from your current business.
Benjamin Franklin is credited with the adage, “In this world nothing is certain but death and taxes.” That statement is as true today as it was when he wrote it more than 200 years ago. We can add another truism for today’s business owners: You will exit your company one day in the future.
Your exit from your company may be planned or unplanned. The exit may bring satisfaction or dissatisfaction to you and your family. It may be to the benefit or detriment of your employees or associates. It may bring great financial reward, or it may bring financial devastation.
The exit may bring fame or shame to your family and friends. It may be the continuance or discontinuance of the company you have worked so hard to build and create. The exit may be to the benefit or detriment of your competitors. Regardless of the consequences, you will someday exit your company in one form or another.
The big picture
The beginning of the process to sell a business requires a certain mind-set. It requires a short-term focus. The beginning of the focus process is to accept that certain things are currently outside your controls, such as:
- The global economy
- The actions of leaders in Washington, D.C.
- The fair market value of assets that you own
- Future increases in income or estate taxes
- New regulations that might be imposed upon your business
It is natural to be concerned about such matters. Upon close examination, these are all long-term issues that are currently beyond your control.
The process of selling your business is a short-term project. You will have time and, hopefully, a lot of money to revert back to being concerned about these subjects after the successful sale of your business.
- Improving the value of your business
- Improving certain efficiencies within your business
- Associating with good exit strategy professionals
- Building a successful exit strategy team
- Following a step-by-step process to sell your business.
The following, written by American theologian, Reinhold Niebuhr, might help us keep focused on the short-term things that are under our control.
God, give me grace to accept with serenity
the things that cannot be changed,
Courage to change the things
which should be changed,
and the Wisdom to distinguish
the one from another.
- Work in the business until you die
- Semi-retire and let someone else run the business until you die
- Liquidate the assets of the business, either voluntarily or involuntarily
- Sell the business
These processes focus solely on the latter: Sell the business. Naturally, one of the concerns that business owners have is who will eventually buy their business.
There are multiple possible buyers for a closely-held business. Some of the most common possible buyers are:
- A strategic buyer, such as a competitor
- A buyer who sees a financial opportunity
- Management Buyouts (MBO)
- Family Members
- Employee Stock Ownership Plan (ESOP)
- Private Equity Groups (PEG)
- Initial Public Offering (IPO)
Find the right buyer
It is common for a business owner to become distracted about the potential buyer and what the buyer might do to the business long before there is even a discussion with the prospective buyer. Some of the most common concerns of business owners are:
- The legacy of the name and reputation of the business
- The price that will be paid
- The after-tax amount that will be available
- Whether the transaction will be paid in cash or in a long-term note
- Potential impacts of the sale to current employees
- Effects on family members working in the business
- Paying off the current debt owed by the business
- Disclosure of trade secrets before the transaction closes
- The length of time the owner will be required to stay after the sale
Our advice is not to be preoccupied with these issues at this time. There will be sufficient time to work on these details during our process. These burdens should be shifted off your shoulders and onto the shoulders of other people. We call these people The Dream Team.
The Exit Plan
In the absence of a valid exit strategy, events will inexorable dictate the final exit plan for the business.
Exit plans may be as varied as each venture’s needs and purposes. In the absence of an Exit Plan, it is probable that an involuntary exit will be enforced by any number of circumstances: loss of market, competition, a better mouse trap, changes in customer acceptance, inept management, catering to wants instead of needs, lack of cost controls, etc.
Begin with the end in mind
To begin with the end in mind means to start with a clear understanding of your destination. It means to know where you’re going so that you better understand where you are now and so that the steps you take are always in the right direction.
Dr. Covey not only emphasized going in the right direction, he also taught that it takes leadership to make sure one is going in the right direction. He taught the following about the difference between leadership and management:
Leadership is not management.
Management is doing things right; leadership is doing the right things.
Management is efficiency in climbing the ladder of success; leadership determines whether the ladder is leaning against the right wall.
The leader is the one who climbs the tallest tree, surveys the entire situation, and yells, “Wrong jungle.”
The right jungle – The first decision
It is time to make the first important decision in this process. The principles of this decision combine the teachings of Dr. Covey and Reinhold Niebuhr. This step is you taking the leadership to head in the right direction with the attitude of having courage to change those things that are within your power. The recommended decision is:
To increase the value of your business with the goal of having multiple bids to purchase your business.
In the short term, put behind the concern of who might someday buy your business. It is now time to begin the process to build so much value that, hopefully, you will have multiple buyers who might want to purchase your business.
This is a serious mistake. The business owner should continue to increase the value of the business. This is typically done by continued focus on those things that increase the value of the business. This is typically done by continued focus on those things that increase the future value of the business. Those activities are typically increasing sales, finding new customers, building better relationships with current customers, etc.
- Defining Financial Needs
- Determining Business Value/Price
- Determining is the Business Sellable
- Exit Planning
- Personal Wealth and Estate Planning
- Planning for an Ownership Transfer
Opinion of value
Sometimes it might sell for much more than its value; other times, unfortunately, it might sell for much less (particularly if you do not have professional assistance). Thus, price and value sometimes do not match.
One thing is for sure, if you do not know the value of your business, you will have no idea if the price you are getting is a poor, fair or awesome deal. Obviously, the more information you have at the negotiation table, the better position you will be in to exit on your terms.
Peter Butler, CFA, ASA, MBA (www.valtrend.com) works in close association with Joe Cacopardo. If interested in receiving an independent, objective opinion of value, let’s talk.