This is a guest post by Glenn Grant. Glenn is a serial entrepreneur and business coach with Selfassembled Ventures. He works with fellow business owners to build greater business value and world-class leadership teams—with a particular focus on pre-exit value building. In this post, he shares his tips for how to prepare to sell a business.
One thing I’ve learned about entrepreneurs and business owners over the years is that they’re always coming up with new ideas. If you’re considering how to sell a business to pursue your next opportunity, there are both personal and business factors to consider.
Work to optimize each driver and build value now, and you’ll find yourself in the best possible spot once the sale closes.
Are YOU ready? 4 drivers to maximize personal satisfaction
Before you even start evaluating your business, you need to take stock of your own readiness to sell your business. You’ve probably put a lot of yourself into this company over the past years—it might be harder to let go of than you think.
There are four key drivers that will contribute to your personal fulfillment after the sale.
Driver 1: Future vision
I have carefully thought about my future and I have a clear vision of what I want to do next.
Why are you looking to sell your business? What will you do afterward? How done are you when it comes to working?
If you’ve dedicated most of your time to your business for the past several years, jumping into a lot of free time can be jarring. Make sure you have an idea of what you want to be doing after the sale. Considering your future and lining up some plans will help you to feel more fulfilled—and less empty.
Driver 2: Structuring flexibility
I know what my number is, and I have thought through an earn-out scenario carefully.
Have you considered your practical financial requirements around your exit? How much is your business worth to you? What’s your bottom line when you go to sell your business? How much are you willing to earn over time?
Are you open to an earn-out situation, or do you want an all cash deal? If you’re considering an earn-out, how much are you willing to risk, and how long are you willing to work in the business after you sell it? Working in this type of scenario can be challenging when you’re used to working for yourself, so consider earnouts carefully—while remaining flexible on how your deal is structured.
Driver 3: Personal detachment
I’m 100% ready to let go of my business, and I am ready to move on to the next thing.
How personally attached are you to your business? Is it essentially your baby? Have you built a fulfilling life outside your business? How much of your self-worth is wrapped up in the business?
It’s natural to be proud of your business (you probably should be!), but that can lead to difficulty transitioning away from it. If this sounds like you, start to focus on building a fulfilling life with friends, family, and activities outside of your business. Who would you like to spend more time with? What hobbies shave you always wanted to try?
Related: 3 Ways to Invest in Your Children
Driver 4: Team involvement
There are probably some people on your team that need to be involved in the sale process. However, for each employee you tell about your exit, the more likely to deal is to collapse before it comes to fruition. Employees may begin looking for other jobs, clients and customers may get spooked and jump ship, etc.
You’ll want to carefully consider if there’s anyone you want to involve in the sale from the beginning.
Is your business ready? 8 opportunities to maximize value
Most business owners jump immediately to increasing revenue and profitability when considering a sale—you understandably want to get your numbers up. If you can get increase your numbers now, you can increase your sale price.
But revenue and profitability are not your buyer’s only considerations. In fact, there are 8 key drivers of business value.
1. Financial performance
As we just discussed, making more money now will allow you to increase your sales price.
2. Growth potential
A buyer is buying your future stream of profits. They often buy because they think they can do a better job at growing the business than you can (especially in the case of private equity). They want to know that the market is not tapped out—that there’s opportunity to sell more products and services to existing customers, as well as opportunity to sell into new markets.
You can increase your growth potential by dipping your toe into new markets and considering new products and services.
3. The Switzerland structure
Your business will be worth more if you are not overly reliant on any single customer, employee or vendor (you’re neutral, like Switzerland). Diversification of revenue if especially important. Imagine you have a single client that’s responsible for 50% of your revenue. What happens when you sell the business and the client decides to leave? It’s also a red flag for buyers if there’s a single key vendor holding you hostage or a unicorn employee that leaves if you leave.
Work to diversify both your clients and vendors. Considering putting incentive plans in place for any key employees you want to retain to and through the sale.
4. Valuation teeter-totter
This one is all about cash flow. Does your business have the ability to generate a pile of cash you can use to fund growth in future endeavors? Or are you dipping into arrears to run payroll as you wait for your money to come in? This is a common challenge if you work with the public sector, for example. Buyers don’t want to have to extend a lot of credit.
5. Recurring revenue
Buyers love recurring revenue. Do you have any now? How much? What total percentage of your revenue does this represent? What can you do to add more recurring revenue to your mix? Even creating 10% to 20% is better than nothing. Ask yourself what little things you can add to increase the stickiness of your offerings—and entice customers to sign up on a recurring basis.
6. Monopoly control
A business that’s differentiated in the market will typically sell for more than a commoditized business. Glenn explained that this is why he pivoted one of his own businesses from managed IT (crowded) to managed cloud (less crowded). When you’re differentiated, you have more demand and the ability to set your own prices—because you’re not competing against a bunch of similar vendors.
Consider what pivots you can make—in your offerings and/or your messaging—that set you apart from the other guys.
7. Customer satisfaction
Buyers want to know that your customers will stick around after you’re gone. Happy customers also typically mean more referral business. The gold standard for measuring customer satisfaction is the net promoter score (NPS), so work on getting yours up.
8. Hub and spoke
Are you the center of the universe for your business? Is your name on business? Do you know all of the clients? Do you hold the key to operations and service delivery? If the world revolves around you, your buyers will want to buy you alongside the business—and you’ll be locked up in an earn-out.
To avoid this situation, work on building and empowering a leadership team, getting your business to run itself—and start working on your life outside the business.
If you’re feeling confident about your readiness to sell, stay tuned for details on the next step in selling your business: doing your due diligence.
You may also want to check out this webinar that covers how to prepare to sell your business in detail.
