Every business owner has a big dream to sell their business one day and see it continue on successfully. But, when that day comes, we realize that we know how to run a business, but we don’t know how to exit a business. This thought leaves us frustrated, confused, and sometimes overwhelmed. Exiting a business shouldn’t be as difficult as it seems. Can’t someone help me figure this out?
As with anything in business, we have to start with mindset first, then skill set. According to statistics, there are 12 million Baby Boomer business owners that may exit their business in the next 10-20 years. Many of us have our head down just running our business. We refuse to confront that the day is coming when we will either close our business, sell it to employees or family, or sell it to investor. No planning takes place.
To get our mindset right, instead of asking the question, “What’s my business worth?”, we should be asking the question, “What amount do I need to achieve financial freedom?”. I define financial freedom as an amount of money or income to secure my retirement over my life expectancy. So, I start with an annuity calculation. How much income do I need in retirement, for how long (life expectancy), and what conservative rate of return can I earn on my money (I’ve used 6-7%; your number may be higher or lower).
I have several clients that have achieved financial freedom without monetizing the value of their business. Can you imagine the clarity you would have if you didn’t need to sell your business to achieve financial freedom? We’re all looking for clarity and peace of mind knowing our retirement is secure or close to it.
Getting a business ready for sale is a little like getting a house ready for sale. You want to maximize the value of your house. So, you spend some time and money updating the kitchen and bathrooms, put a fresh coat of paint on the walls, and clean the carpets. You want as much value to transfer from seller to buyer as possible. Selling a business is similar, but the stakes are higher because the value of your business is usually much higher than the value of your home and this is (usually) the only business you’re going to sell.
Once you’ve achieved financial freedom clarity mindset, you can move to skill set and how a business gets prepared to sell for maximum value. In the future, we’ll be talking more about what’s involved including:
- Building transferable value, management agreements with key people with compensation that ties them to the organization for a period of time after the sale
- Reliable financial statements to include an independent indication of value based on a CPA review or audit of the financials
- How the company achieves revenue goals and results, increases profit margins, manages the business, and how the company differentiates itself from competitors
- A growth plan for the next 3-5 years and how that growth can be achieved
Don’t keep your head down for so long that when the day finally comes for you to retire, you haven’t done any planning. Failing to plan is planning to fail and the stock in your company is the largest asset on your personal financial statement. Assemble your team: a CPA to discuss tax consequences, an attorney to discuss any legal issues and contracts, and a business advisor to help you with any mindset, strategy, or execution issues.
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