Selling Your Business When "You Are The Business"
When it comes to exiting your business, you have a few tools at your disposal to make it more attractive to potential buyers and improve the sales price. You can firm up the financials, eliminate those long-neglected recurring expenses, get rid of old inventory, offer to finance a portion of the sale over a few years, and hire a business broker to find the perfect buyer and negotiate the best terms.
There’s one more fundamental shift that you, as the business owner, will likely need to navigate to make your business an attractive acquisition – and that is to get yourself out of the picture before you sell.
Shake the Hands-On Owner/Operator Mentality
Successful business owners are, by and large, driven to succeed. For many, that means putting in long hours, directing everything, wearing many hats, and generally being the one to “get things done”.
While this level of effort is admirable – and often necessary – when building and growing a thriving small business, when it comes time to market the business to a potential buyer, it can have a negative effect on business value and selling price.
Ask any business broker about their top five recommendations to business owners planning to exit, and you are bound to get some flavor of “remove yourself from daily operations”. We’ve heard, “delegate everything”, “fire yourself”, “become an absentee owner”, or “make yourself redundant”.
The bottom-line is, when you’re planning to sell your business, it’s important to shift your mentality and approach, and to consider the perspective of an investor.
Selling a Business vs. Selling a Job
Potential buyers are going to look at your business operations and financials and value it based on an expected rate of return on their investment. Chances are the crux of the valuation will be some multiple of expected earnings.
The math is simple enough, but the relative multiple that a buyer will apply to a given business depends largely on how efficiently the business is run. Buyers are interested in acquiring your cash flow, not (necessarily) your job.
If your business earns you $200,000 a year but requires that you work 60 hours a week keeping everything running, it is not likely to fetch more than one to one-and-a-half times earnings - $200,000-300,000.
On the other hand, if the day-to-day operations are handled largely by your employees, leaving its owner to focus on high-level strategy and growth, that same business with the same SDE may be worth $500,000 or more.
Take Steps to Exit Before You Exit
If you’re considering retiring or otherwise exiting an ongoing business, it pays to get out of your own way ahead of time. Start training key employees to manage things without you. Look at your operation and find opportunities to delegate time consuming and recurring work.
Looking at the math, it may pay to promote a key employee to a managerial position, even if it costs you a bit of annual SDE. There is the added benefit of engaging your most important employees and preventing them from leaving in the middle of the deal.
Your business doesn’t have to “run itself”, but the less reliant your operation is on you, personally, the better your chances of closing a sale at a good price.
Exit Planning? Adopt the Buyers Viewpoint
Selling your business effectively requires that you adopt a different approach from the one that served you so well while running and growing your operation. As you plan to step away from the business you have built, remember to look at things from the buyer’s perspective, and act accordingly.