Thousands of businesses are being sold cheaply each year thanks to the global economic situation. I believe that every startup should be considering the sale of their business as their ultimate end game. It helps to successfully build your business with structure and purpose regardless of whether you sell it or not. So, how do you ensure that your business sells for the optimum value?
Most businesses sell for a typical multiple.
If you are thinking of selling your business how do you ensure you get the highest price? Most businesses sell for a typical multiple which is often around four times their value. A smaller group of entrepreneurs sell for far more than that multiple and there is nothing particularly remarkable about their businesses. So how do they do it?
Work out the value of your business to someone else.
I spoke to John Warrilow on my Transition Man Podcast. He gave me a very strong example of a US business that beat the multiple when they sold. The business was a payroll company specifically for people who pay privately for nannies/childcare. After 25 years the business was turning over 9 million dollars and had 10,000 customers. The founder looked at another thriving business in the sector which provided nannies for parents needing childcare, that business had 7 million subscribers all who needed to pay their nannies. The payroll founder calculated that 1% of 7 million is 70,000 which is 7 times the size of her company. She managed to sell the 9 million turnover payroll business for 54 million dollars – 6 times its top line revenue. When selling your business look at your business model and work out which other businesses it might be useful to.
Selling a business takes time.
Be warned: Selling a business takes time. You will have to go through a period of due diligence which can be as little as a year or as much as four years where the buyer is looking at all the financial aspects of the business. Before that you have pre due diligence where you are getting the business in a position to sell by looking at the market and identifying possible buyers as well as creating a package which demonstrates to buyers why your business is so valuable to them. Finally after you have completed your sale you have an earn out clause which is covered in more detail below. In reality selling your business could take as much as 7 years in total.
The post purchase relationship.
Also known as the earn out part of a sale. When selling your business, earn outs can deeply affect the profit of a sale. A buyer will agree to pay x amount for the business. Payment of say 20% might be given at the time of the sale. The extra 80% may be due once the earn out clause has been completed. Earn outs can be as much as seven years or as little as 6 months depending on how much value the buyer attributes to you as an individual. Earn outs very often include you having to personally hit targets to get the rest of the sale price. If you don’t you may not realize the full price of your sale.
Make yourself redundant within your business.
When selling your business how can you ensure that you don’t have to agree to a long arduous earn out period after the sale? The answer is work on making yourself redundant within the business. The less worth you have, the less valuable you are in an earn out clause. If the business runs smoothly without much input from you because you have put structures in place in the pre due diligence part of the process, it will minimize the time you need to spend in the business once a purchase is done. The idea really is to maximize your upfront payment and minimize the proportion of your earn out deal.
Tie your earn-out to something you fully can control.
Earn-outs are typically your earnings as a division of a company of another company. As soon as you have sold your company you give up the ability to run your own bookkeeping. When selling your business try to avoid tying your earn-out to earnings. You may try to tie it to top-line revenue which is something you will likely be able to still have some control over. It may be that you can introduce a new product that only you can deliver.
If there’s anything that resonates with you or you are looking to sell your company get in touch here to see if I can help. Remember failing to learn is learning to fail.