August

19th

2015

Exit Planning: Do You Know Your Sell-By Date?

By

Selling a business is not a sprint. You don’t need to be Usain Bolt. The reality is that it takes a long time to sell a business.

Most business owners will imagine their exit as a frantic relay, runners jostling for position, giving it their all to successfully transfer the baton to the next business owner. As the baton leaves your hand and you take the opportunity to slow to a jog, you begin to smile and relax as the ownership and responsibility is now with someone else.

That’s probably how a lot of people picture things; something like a 4 x 400-metre relay race.  You have an idea, you start a business, you launch to huge accolades, build something valuable and someone then buys your business for millions. You bank the cheque and ride off into the sunset. It happens, not very often, but it happens. So why shouldn’t it happen to you?

Unfortunately, the process of selling your business looks more like an exhausting ultra-marathon than a sprint. It takes years and a lot of planning to make a clean break which means it pays to start planning sooner rather than later.

Here is how to backdate your exit:

Step 1: Pick Your Sell-by Date

The first step is to figure out when you want to be completely out of your business. The day you walk out of the building and never come back. Maybe you have a dream to sail around the world, put your children through university, donate your time to charity, or it may simply be your retirement age.

Whatever your goal, the first step is writing down along with notes as to why the date is important, what you will do afterwards, who with and why.

Step 2: Estimate the Length of Your Deferred Payment

When you sell your business, you may get paid in two or more stages. You will get the first check when the deal completes and the second at some point in the future. The terms of this depend on the type of business you are in.

The average earn out these days is three years. If you are in a professional services business, your earn out could be as long as five years. If you are 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 a business broker, putting together a marketing package for your business, researching potential buyers, hosting management meetings, negotiating terms, going through due diligence.

Depending on the complexity, it could take anywhere between 6-12 months, so err on the side of caution.

Estimate: + 1 year

Step 4: Create Your ‘Status Quo Window’

You need to budget some time to run your business without making any major strategic changes. A buyer is going to want to see how your business has been performing 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 did not make any major changes to your business model. We are talking MAJOR strategic changes. The every day promotional, staffing and price changes need not be frozen.

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 those changes.

Estimate: + 3 years

Step 5: 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 on a beach by age 50. You budget for a three-year deferred pay 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 business broker by age 46.

Then let’s say you are still tweaking your business strategy, 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 break from your business after an all-out sprint to the line.  For the vast majority of businesses however, the process of selling a company is a complicated, multi-year long distance run. So the sooner you start, the better.

If you are considering your business exit and require further guidance, please call 01606 535020 today or contact us.