It Depends On Your Plan
How do entrepreneurs decide on the right time to sell their business? Often, by the time an owner contacts us, they’ve already decided they’re ready to exit the company. They may just be burned out and ready to walk away, or they may have health or family issues that make this the right time to sell. They may be excited to take some risk off the table by cashing out of their business and may be excited about the next phase of their lives. Sometimes, owners are not yet ready to sell but realize that they need an expert to help them strategize and prepare for a successful exit in a few years.
When I work with business owners, these are some of the first questions I ask. Why are you thinking about selling now? How urgent is your timeline? How much energy and passion do you have left to give the business?
The next step is to determine the owner’s financial goals. How much money do you need to fund your retirement? What do you think your business is worth? How do you envision the structure of the deal? Is owner financing an option? Would you consider staying on to run the business for a couple of years once the burden of ownership has been taken off your shoulders?
Next, I do an analysis and offer an opinion of value. This is usually when the idea of the sale becomes real for the owner. If the market value matches the owner’s needs and expectations, there’s no reason not to list it right away.
But it’s important to be sure the owner understands the final number they’ll realize from the sale. There may be debt that must be paid down after the sale, and there may be much more tax liability than the owner realizes. A good financial advisor or CPA can help them understand the capital gains implications and create a strategy for mitigation.
What if there’s currently not enough value in the company to meet the owner’s goals? When that’s the case, many owners simply put off the decision to sell. They kick the can down the road for a couple of years and hope that the company’s value will have grown by then.
But without a plan for growth, simply delaying the sale is not a sound strategy.
The economy or the market demand for your sector may decline within the next couple of years. The cost of financing may go up, limiting the pool of qualified buyers. It’s also possible that your company may lose value, especially with an owner at the helm who has no gas left in the tank.
If you’re going to sell in a few years, it’s worth the investment to ensure that the company you sell in the future is more valuable than it is right now. Here’s the plan I suggest for sellers with a longer timeframe.
First, perform an honest evaluation of your current internal resources.
This starts with the owner. If they don’t have the energy to change the way the business is run, the outcomes won’t change either. Do you have the energy and motivation to drive company performance to higher levels? Do you have a team in place that can take on additional responsibilities and help you increase the value of the company? There should be a clear financial goal (increase sales by 25%, for example) and a clear plan for how that will happen, including who will take on the new responsibilities. Next, you’ll need to hold people accountable to deliver the agreed-upon results. If the internal team doesn’t have the bandwith to do things outside of their day to day responsibilities to drive value, you may need to get oustide assistance..
Second, bring in the assets you need to achieve the goal(s) you have.
If the plan requires you to improve operational efficiencies, will you bring in a consultant or hire an operations manager? If you need to increase sales, will you hire extra sales staff and a manager who can make sure they deliver results? If you need to get your financials in order or pay down debt, will you hire a CFO or a financial manager to organize your bookkeeping and find and fix any issues that affect profitability? We find that many of our clients benefit from bringing in fractional professionals that can offer an outsider’s perspective, bring years of experience, and be cost-effective by avoiding the need for a full time hire.
If done right, the investment an owner makes will pay off in many ways when they are ready to sell the business. A larger, stronger company will attract more and better-qualified buyers when it goes on the market. The seller will be in a better position to negotiate terms and choose the best offer. Every dollar of increased profitability will pay off in multiples when the right buyer makes an offer. And, of course, the owner will benefit financially when they walk away with more money and a plan for mitigating their tax liability.
By now, everyone’s heard the truism that “hope is not a strategy.” If we can help you create a real strategy for growth and a more profitable sale, we look forward to hearing from you. Click here.
