If you are a business owner and the idea of “retirement” sounds scary, even though it periodically enters your mind, it’s likely time to begin planning to sell your company. Put aside your preconceptions about what selling now means to you personally, and remember the single tenet of selling anything valuable:
Always sell from a position of strength.
The price difference in selling your company from a position of strength versus one of weakness will be dramatic, as much as 50-100%. The differences in the terms-of-sale and the risks taken by the seller in the transaction will likely be even more dramatic than the price difference. Buyers will sniff out a desperate seller, and will wrestle value from them at every step of a deal. Here are some tips to consider as you create your position of strength during what should be a multi-year planning effort, ahead of the sale of your business:
Sell your company when you can show growing sales and earnings.
All money managers caution that past results are not indicative of future performance. In selling businesses the same truism holds, but the reality is that buyers have little else to work from. The actual trend is what matters. Buyers need to know, which direction is the business going: up, down, or flat? Positive growth in sales and earnings, regardless of external market conditions, translates into a better sale price and better terms of sale. The simple fact is that buyers want businesses that are trending up. Those that want declining businesses only do it because they can get a great deal. A great deal for a buyer will leave you with the short end of the stick, and wondering what could have been – if you had started planning your exit sooner.
Sell before you reach your own limitations.
Business owners must have the self-awareness to know their limitations, both capabilities and interests, in relation to the business. Perhaps you aren’t a great manager or an inspiring people leader, and might struggle to add another layer of management if the business keeps growing. You may get more value by selling now to an eager buyer at this stage, than you would by doing it yourself and fumbling on growth metrics.
It’s also important to have the foresight to know that your limitations will change as the world around you accelerates. Selling when you are still willing and able to help the buyer with the transition is immensely valuable. It will favorably influence both the purchase price and terms. If the buyer perceives that you will not be an effective trainer, it creates risk and cost for them, and they’ll have no choice but to discount the value or put punitive terms in place to protect themselves if the transition does not go well.
Sell before you throttle back your own effort.
Owners that begin pursuing a lifestyle that prioritizes ‘delighting thyself’ over ‘delighting customers’ typically see a decline in business results. Evidence of reduced effort shows up subtly in many aspects of a business, but sales and profit trends are fully detectable and you don’t want the evidence to show up there. Sophisticated buyers will also assess your trend against the competitive market. If the market is growing 6% and you grew 3%, they will question why you are losing share.
A negative trend, either overall, or relative to the market, creates red flags for buyers, and if it doesn’t kill the deal, the price a buyer is willing to pay will suffer. Most buyers, financiers, and appraisers will be unsympathetic to the common seller excuse, “well, I’ve been less involved this year” when calculating their valuation. Moreover, the protections a buyer will need for purchasing a declining business will also surface in the terms of sale. These problems can be avoided by being honest with yourself as you time your sale.
Sell when profits and profit margins are at their best.
As an owner you can attract the right pool of potential buyer by demonstrating healthy profit margins. You have an information advantage by knowing with a high level of detail what drives your profit margin. You know aspects of costs, past, and future sales that even the smartest buyer couldn’t possibly understand. A smart seller will use this to their advantage to time their sale. Maybe a local competitor went through a meltdown that helped increase prices and win new accounts. Maybe a key input cost is exiting an all-time price trough. Smart buyers will figure some of these things out, but there’s no way to know everything. Buyers extrapolate results, which are a combination of the owner’s skills and effort, and external conditions. If external conditions helped your recent years’ results shine, and you’re already exit planning, now may be the time.
Complex businesses are hard to sell. Simple businesses that are made complex by an unfocused or disorganized owner are equally difficult. If your business has developed non-essential operations over time that create complexity, realize that a buyer may not value them. Worse, they may discount them. Identify these areas and consider what it would take to streamline and simplify. This is especially true in cases where you have aspects of your business – products, services, locations – that add complexity with questionable profitability. You often times get more mileage out of focusing on doing only what you do best.
Sell when you can generate retirement income from the business.
Good businesses create many potential sources of income, regardless of the owner. Former owners can position themselves to continue drawing retirement income from businesses they previously owned through a variety of possible arrangements. Part-time employment, consulting, retained equity ownership, rental real estate, or carve outs are all possibilities. These terms can have a tremendous effect on retiring owners and their perceptions of retirement. Our next post will cover this topic in detail.