If a buyer offered you enough cash for your business to provide you with complete financial security, would you sell today? If your answer is the same as 75% of the owners who answered this question in The BEI 2016 Business Owner Survey, then it’s a resounding “yes.”
Owners are ready to exit today, if the price is right.
Here’s the conundrum: While owners may be ready to exit their businesses, far fewer businesses are ready for their owners to exit. Only 26% of surveyed owners believed that they faced no obstacles to exiting their businesses successfully. However, my experience working with owners suggests that this number is optimistic.
Preparing your business for sale now—before you feel the need to exit because of burnout, health issues, competitive pressure, or other outside factors—ensures that you can leave your business on your own terms and achieve all of your financial and other exit goals. An exit plan provides you with flexibility, leverage, and negotiating power.
If you are prepared for the sale but your business isn’t, you will have to deal with the frustration of making the business ready for sale after you have already checked out mentally. Even worse, you may inadvertently taint the marketplace—a common risk for owners who attempt to sell their businesses before their businesses are ready to be sold.
Owners taint the marketplace when they contact the likeliest buyers for their businesses and those buyers subsequently express little or no interest in buying their businesses. The owners’ lost time and effort are not the only losses that they face.
When a business is pulled off the market without selling, it is difficult to re-enter the market later, when the business is finally ready to be sold. Once buyers have rejected a business, they are unlikely to take a second look. They aren’t going to waste more time looking at a business that they’ve already rejected.
Instead of jumping the gun on a sale, there are two actions I suggest you consider.
1) Determine the likely sale price of your business before you go to market.
In my experience, investment bankers and many business brokers will provide you with an estimate of your business’ likely sale price today, at no cost. If the likely sale price is insufficient for you to exit your business with financial security, don’t go to market. Instead, begin planning and taking action to create sufficient value. Even if you don’t intend to exit for years, it is useful to obtain a realistic estimate of your company’s value now. It will help you determine by how much you need to increase your business’ cash flow and value before you can sell the business and be financially secure.
2) Increase transferable value.
Transferable value is what a business is worth to a buyer without the owner’s continued involvement. Essentially, if the business requires the owner’s presence to maintain and increase cash flow, the company, without the owner, has limited value. Thus, if the owner is ready to leave before the business is ready to continue without the owner, it is necessary to develop transferable value.
Depending on the size of the value gap, it may take 5–10 years of focused effort to create adequate value. When owners who are ready to exit discover that it will be years before their businesses are ready for their exits, having to continue their ownership may be more than they can bear, and a fire sale often ensues.
Preparing your business for a sale before you prepare yourself positions you to sell your business when you want, for the money you need, and to the person you choose.