How to sell Your Business Successfully
Should you start a business with selling it in mind? Yes is the answer, but few people do. However, as a business grows and ultimately scales up, selling it becomes a more attractive and achievable reality.
In 2018, a total of 10,312 businesses were sold which was a 4% increase on 2017. According to the Bureau of Labor Statistics 774,725 entrepreneurs started new businesses in the year ending March 2019.
So, your business has grown and now your revenue is rising faster than your costs. You decide you want to sell. How do you get the best price?
Typically most entrepreneurs sell for around four times the industry trade value. There are a few who buck the trend and sell for much higher than the market value. Surprisingly, those entrepreneurs don’t always have the most remarkable companies. So how do they break the mould and sell for a much higher amount than those around them? They look at the value of their assets through the eyes of the buyer and often that exceeds the market value.
Here is an example: A small payroll company facilitates parents paying for childcare. It has 10,000 subscribers and offers a reasonable turnover of 9 million dollars a year. The CEO notices a fast growing online company which links parents with childcare in their locality; they have around 7 million subscribers who all have childcare to pay. The CEO thinks if I had just 1% of those 7 million subscribers (700,000 subscribers) my company would be 7 times bigger than it is now and it would be worth much more. Ultimately the CEO did a deal with the online company and sold her business to them for six times the yearly revenue. She knew that her business was going to be much more profitable in the hands of the online company and that the sale price should reflect the profits they would see. This was an exceptionally high sale and a rarity, but it can and does happen.
Think about who you want to sell to and what value your business will add to theirs? Is it worth considerably more in their hands? Like many transactions – the value is what someone is willing to pay. The buyer decides the value ultimately and the market helps to determine it.
When selling a business you must consider the transitional period when thinking about value. Selling a business is not like running a relay race. You do not run as hard and fast as you can, hand over the baton and walk away. The reality is that there will be a transitional period where you are working for the new owner. This is commonly known as the earnout period. It could be for a period of three years or as much as seven years in the case of a private equity group. Selling a business takes years. First you have to do your pre due diligence where you show the business to the market and gain interest amongst competitors. This part can take 3-5 years. To maximise your value, it is important to carefully consider this part of the exit strategy. Arrogance rarely pays off but communicating to the buyer that you have their competitors interested, will help to raise the value of the business in their eyes. The process of actually making the sale often takes around a year. Then the post purchase relationship, the earn out period, begins. This is where you agree a period of time that you help to ensure the business continues to trade effectively and profitably. Earn out periods can be up to 5 or 6 years.
Transitioning and the earn out phase is a huge part of the sale as getting your full sale price often depends on it. Whilst building your business up from the beginning, ensure that you are structuring it so that you are almost redundant. That way you can keep the earn out period to a minimum once the sale is done. Earn outs should be kept to a minimum as they are always based on profit targets, which can be a movable feast and are often not realised. For example you are offered 7 million pounds for your business.
3 million upfront and a 4 million earn out dependent on targets being hit at certain times. Often targets are linked and if you miss your first target, it can be hard to hit the second. You could end up missing all your targets and walking away with 50% less of the purchase price than you agreed. Your job as an entrepreneur is to maximise your upfront payment and minimise the earn out part of the deal. Think carefully about what you want to tie your earnout to. Agree to targets that you can control despite relinquishing overall control of the business.
If anything above resonates with you and you’d like more advice on getting your business ready to sell please contact me.
Remember failing to learn is learning to fail.