In an ideal world the business owner will:
- Decide that they want to sell their business
- Plan their exit
- Prepare the business for sale
- Market the business
- A buyer or buyers appear at the right time
- They fly through the due diligence process
- Sell their business for the price they want
- Sail off into the sunset
So let’s review each point one by one;
1. Decide that they want to sell their business
Most business owners have the idea their business is their pension. When the time right they will sell it and retire. They don’t consider that ill health might strike them or one of their loved ones. That their children and grandchildren have emigrated and that they might want to join them. A host of other changes to their personal circumstances. What would happen if someone was interested in buying your business now? I doubt that the business would be in a position to be bought, for some of the reasons listed in 3 below. This is why I refer to Exit Planning as Opportunity Planning. You never know when that opportunity is going to knock on you door, or when you want the opportunity to sell.
2. Plan their exit
Most business owners will underestimate the amount of time it will take to prepare the business for sale and start planning their exit far too late. Unless they have bought or sold a business previously they will also underestimate the time the process takes and the need for sound advice from a trusted advisor that has experience in the process.
3. Prepare the business for sale
Preparing a business for sale is not just about the sale process, it is about building value in a business. The buyers will be looking for a sustainable and scalable business that works without the business owner being in the business. Sadly, currently over 75% of business don’t ever sell. The business owner hasn’t built value in the business. Why would someone want a business that is dependent upon the business owner?
I firmly believe that all businesses should prepare themselves for the opportunity to sell irrespective of if they are planning to sell or not. It will make their business more profitable, they will have more time and they will have more fun!
4. Market the business
Most business owners market their business to their competitors. They haven’t considered building something that is valuable to their suppliers or to different industries.
5. A buyer or buyers appear at the right time
Going back to Opportunity planning – when is the right time? What about external factors like the economy? It has been even harder to sell businesses since 2008.
6. They fly through the due diligence process
Anyone that hasn’t been through the due diligence process will be amazed by how much is asked for and the time it takes to collate the documents. When the buyer asks for copies of all customer contracts it will be too late if you haven’t been prepared for this over the last couple of years – you won’t have vital contracts in place or if you do you can’t find them. This will reduce the selling price.
7. Sell their business for the price they want
There are industry standard multiples and methods for valuing businesses. However the due diligence process will highlight weaknesses in the business and bring the selling price down.
8. Sail off into the sunset
Unfortunately where there is risk that the business depends upon the business owner, or where it isn’t a scalable and sustainable business where the financial forecasts can be relied upon, the buyer will insist on an “earn out period”. This is where there is a deferred contingent payment where the owner has to stay in the business for up to three to five years. No sailing off into the Horizon for them. Having taken the decision that they want to sell the business they find that they have to stay in the business to earn the profits to be able to pay them the money that they thought that they should have had in the first place! Pretty demoralising.
Sadly it is only 1% of business that sell for the price that the business owner wanted, without an earn out period. The majority of those businesses had planned for the opportunity and had invested in a trusted Exit Planning advisor.
Mustard – Giving successful business owners the tools, advice and confidence they deserve.