Republished with permission from Built to Sell Inc.
Most business owners think selling their business is a sprint, but the reality is it takes a long time to sell a company.
The sound of the gun sends blood flowing as you leap forward out of the blocks. Within five seconds you’re at top speed and within a dozen your eye is searching for the next hand. Then you feel the baton become weightless in your grasp and your brain tells you the pain is over. You start an easy jog and you smile, knowing that you did your best and that now the heavy lifting is on someone else’s shoulders.
That’s probably how most people think of starting and selling a business: as something akin to a 4 × 100-metre relay race. You start from scratch, build something valuable, measuring time in months instead of years, and sprint into the waiting arms of Google (or Apple or Facebook) as they obligingly acquire your business for millions. They hand over the cheque and you ride off into the sunset. After all, that’s how it worked for the guys who started Nest and WhatsApp – right?
But unfortunately, the process of selling your business looks more like an exhausting 100-mile ultra-marathon than a 100-metre sprint. It takes years and a lot of planning to make a clean break from your company – which means it pays to start planning sooner rather than later.
Here’s how to backdate your exit:
Step 1: Pick your eject date
The first step is to figure out when you want to be completely out of your business. This is the day you walk out of the building and never come back. Maybe you have a dream to sail around the world with your kids while they’re young. Perhaps you want to start an orphanage in Bolivia or a vineyard in Tuscany.
Whatever your goal, the first step is writing down when you want out and jotting some notes as to why that date is important to you, what you will do after you sell, with whom, and why.
Step 2: Estimate the length of your earn out
When you sell your business, chances are good that you will get paid in two or more stages. You’ll get the first cheque when the deal closes and the second at some point in the future – if you hit certain goals set by the buyer. The length of your so-called earnout will depend on the kind of business you’re in.
The average earnout these days is three years. If you’re in a professional services business, your earnout could be as long as five years. If you’re in a manufacturing or technology business, you might get away with a one-year transition period.
Estimate: + 1-5 years
Step 3: Calculate the length of the sale process
The next step is to figure out how long it will take you to negotiate the sale of your company. This process involves hiring an intermediary (a mergers and acquisitions professional, investment banker or business broker), putting together a marketing package for your business, shopping it to potential acquirers, hosting management meetings, negotiating letters of intent, and then going through a 60 to 90 day due diligence period. From the day you hire an intermediary to the day the wire transfer hits your account, the entire process usually takes 6 to 12 months. To be safe, budget one year.
Estimate: + 1 year
Step 4: Create your strategy-stable operating window
Next you need to budget some time to operate your business without making any major strategic changes. An acquirer is going to want to see how your business has been performing under its current strategy so they can accurately predict how it will perform under their ownership. Ideally, you can give them three years of operating results during which you didn’t make any major changes to your business model.
If you have been running your business over the last three years without making any strategic shifts, you won’t need to budget any time here. On the other hand, if you plan on making some major strategic changes to prepare your business for sale, add three years from the time you make the changes.
Estimate: + 3 years
Figuring out when to sell
The final step is to figure out when you need to start the process. Let’s say you want to be in Tuscany by age 50. You budget for a three-year earn out, which means you need to close the deal by age 47. Subtract one year from that date to account for the length of time it takes to negotiate a deal, so now you need to hire your intermediary by age 46. Then let’s say you’re still tweaking your business model – experimenting with different target markets, channels and models. In this case, you need to lock in on one strategy by age 43 so that an acquirer can look at three years of operating results.
It certainly would be nice to make a clean, crisp break from your business after an all-out sprint, but for the vast majority of businesses, the process of selling a company is a squishy, multi-year slog. So the sooner you start, the better.
This Sellability Score you instantly receive is a critical component to any business owner’s complete financial plan and is something that, until now, we have made available only to existing clients.
However, we recognized that there is value in knowing in advance of working with a financial planner whether or not your largest asset is ready to be exchanged for your retirement nest egg. Our view is that it’s better to learn more about your businesses sellability today, and find out how your business scores on the eight key attributes, so that you can ensure you obtain full value.
If your business part of your retirement plan, finding out your sellability score will be the best 10 minutes you could ever spend working “on” your business.
For more free information on Creating A Business Owner’s Dream Financial Plan, you can listen to a free, eight part series we did exclusively for business owners. The show is also available to subscribe to for free via iTunes.
