There’s an old Chinese proverb that says, “The best time to plant a tree was 20 years ago. The second best time is now.” Most business owners start planning their exit when they’re ready to sell, when the better time to plan was the proverbial 20 years prior.
For many business owners, the sale of their business will make up the majority of their nest egg. In fact, a significant portion of the baby boomers are relying on the sale of their business to be able to retire. With so much at stake, why do we tend to put such an important activity off?
Business owners and entrepreneurs are usually caught up in the day to day activity, so immersed in problem solving and focused on goals that exit planning just doesn’t seem urgent. And there you have it, Urgent always trumps Important when it comes to human nature.
To get the outcome you ideally want, it’s important to start with the end and work backwards. How much would you like to sell your company for? The answer to that question will tell you the kind of company you need to build to sell it for the amount you want. The biggest, most important, and most profitable product you have out of all the things you sell- is your business. To get the exit you want, make your business the most important product you sell.
Planning your exit in 5 easy steps:
1) Decide how much you want to sell your business for.
2) Look at the average multiple a business like yours is selling for. It will vary by industry and size but to give you a general ideal, according to BizBuySell, the average business sold for 2.35X it’s cash flow. For businesses above $1M in revenue, that number increases to 3.66X.
3) Look for ways to increase that multiple by finding closely related industries that are trading at higher multiples, that you can participate in. For example, before WeWork imploded, they sold equity in their company at a tech valuation, labeling themselves as “Space as a Service.”
4) Create a “Buyer Persona” – Just like you would in any other sale, identify what the perfect buyer would be for your business. Is it a larger competitor? An executive in the industry who would one day like to go out on their own? Someone who sells to the same market but that’s not a direct competitor? Maybe it’s a public company. Figure out in advance who the ideal buyer is for your business.
5) Build the business you want to sell. With the exit in mind, you can build the company, brick by brick, to become the company that will give you the best exit. A company that is most appealing to your ideal buyer.
By following these 5 steps, you will put yourself in the best position to get the most out of your exit. Don’t do what most business owners do- Never thinking about selling until they want to sell, not having a company that is worth what they would have liked to get paid, and having no idea of who would even buy them. By being proactive, you will avoid having to deal with the pain that goes with it- Low valuation and too many days on the market.