Every business owner dreams of a big pay day when they sell their business and go off on around the world trip. However, many owners don’t follow a unified strategy of how to go about selling their business, leaving them confused and frustrated because they don’t know where to start.
The top 2 characteristics of a quality business are a capable management team and lack of owner dependence. I worked with a business owner for over a decade. He started with a management team of himself, his partner, and a COO. The owner was the visionary and the other two excelled at execution. It was a perfect arrangement.
The company grew. With growth comes increased complexity, so over the last 3 years they’ve added a VP of Sales, a VP of Marketing, a General Manager, and recently, a VP of Finance. This management team is incredibly talented and has almost doubled the company revenue in the past two years. While they’re still getting used to working together, I believe the best is yet to come for this company.
A capable management team enhances the business value because they can continue to operate the business without the owner’s presence. It also demonstrates a lack of owner dependence because management is delegated and not consolidated with the owner. Management agreements with these key employees with compensation that incentivizes them to stay for a time after the sale is critical. These agreements could include a variety of options such as phantom stock, stock appreciation rights, or cash. Without it, these employees could leave when the company sells, leaving the buyer with no one to run the business. It’s likely no buyer would agree to a sale without these agreements.
If you’re a professional services provider or a solopreneur, it’s going to be tough selling if the value of the business is you and there is no transferrable value. That’s not to say it’s impossible. But, the acid test is, “Can your business survive if you take a month off to take a trip?”. If the answer is yes, then you might have some transferable value. If the answer is no, then you may have some work to do.
Having management agreements with key people in your organization with stay pay after the sale is critical for any buyer wanting to purchase your company. There are other components in the unified strategy of selling your business. But, this is probably the most important one to start with.
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