For many family and founder-owned businesses, the decision to sell is a significant milestone—one which often comes with a complex mix of personal and professional challenges.
Unfortunately, many business owners are unprepared for the process. A surprising 70% to 80% of owners who try to sell their business are unsuccessful. And of the 20% to 30% who do sell, only 5% are both happy with their sale and the money they received.
According to Suzanne Durbin, a Certified Exit Planner and Private Wealth Advisor with Level Four Group, who has guided many business owners through their exits, the key to achieving a successful exit is being able to answer three questions confidently:
- Am I financially ready?
- Is my business ready?
- Am I personally ready?
She says that until a business owner can answer “yes” to all three, they’re not truly ready to sell- and risk joining the many owners who end up disappointed with their exit.
Am I Financially Ready?
To answer the question, “Am I financially ready?”, Durbin says owners need to find their “magic number”. This is the amount of capital needed from the sale, combined with existing assets, to support their desired lifestyle for the rest of their life. Once owners know their number, Walden M&A can provide insight into what buyers in the current market might be willing to pay- revealing any potential gap between what the owner needs and what the business is likely to sell for.
Durbin explains this is where forming a relationship with a professional M&A firm like Walden M&A can make a real difference. She shares an example of a client who had determined their magic number and compared it to what the M&A firm said buyers were currently willing to pay, realizing it would take a few years to close the gap. Because the owner had already established a relationship with an investment banker who stayed in touch, they alerted her when multiples in her industry rose. Because the owner was financially ready, she could take advantage of the market and sell earlier than planned.
Other common mistakes Durbin sees owners make in determining their magic number are underestimating the burn rate and not factoring in taxes. She reminds them that it’s not what they get in the sale, but what they get to keep. Next, owners often run many personal expenses through their business, which they need to add back for their personal financial projections. It’s also best practice to start removing these before going to market, as they can make financials look messy and result in having to do more “storytelling” to a buyer. Finally, Durbin says it is essential to start tax and estate planning two to three years before a sale if your goal is to maximize control and minimize taxes when you sell.
Is My Business Ready?
In addition to financial readiness, Durbin says owners must also ensure their business is ready for a sale. She says there are seven key value drivers buyers look at. By running your business with these in mind, an owner can attract a larger pool of buyers and achieve a higher valuation.
Durbin also emphasizes the importance of understanding the KPIs—Key Performance Indicators— which bring a premium in an owner’s specific industry. She shares a story from her own experience as an owner in a family business that was advised to increase its profit margin from 17% to 20% to receive a premium. They also discovered having more than $1 billion in managed assets would result in a premium. Knowing and planning for these benchmarks helped her company make strategic decisions and receive a better offer.
Am I Personally Ready?
Finally, an owner must be personally ready for their exit. For many, a business is inseparable from their identity. Durbin says a great question to ask is, “What’s the longest vacation I could take and not worry about the business running without me?”. A business that is too reliant on its owner is not truly ready for a sale, and it may also signal that the owner is not yet ready to let go.
The emotional transition can be challenging. Durbin encourages owners to consider what their life will be like after the sale and where they will find their purpose and sense of “flow.” She suggests beginning to shift one’s mindset from being an “owner-operator” to that of a “passive investor.”
Durbin also addresses the importance of relationships. She says since many business owners view their colleagues as family, they must consider where they will get those social needs met after a sale.
The Value of an Exit Planning Team
A successful business exit requires a team of experts. Durbin likens a high-performing exit planning team to a rowing crew, where each person has a critical role and must row in rhythm. If even one person is out of sync, the boat slows down. She says the same is true for an exit — it works best when the advisors are working smoothly together..
A strong M&A deal team is essential for both the buy-side and sell-side processes. As the lead advisor, Walden helps pick the right crew and keeps them rowing together, keeping all parties aligned and informed throughout the process.
Durbin says trying to sell a business alone is a mistake- as the statistics clearly show. It can taint a buyer pool and even have legal consequences if a seller is unprepared. This is why the collaborative approach of a firm like Walden is so valuable. Walden works with a trusted network of professionals, including M&A attorneys, CPAs, tax accountants, private wealth advisors, and exit planners like Durbin, to provide a holistic approach to the M&A process. A well-executed exit plan considers all aspects of a business and its owner to ensure the best possible outcome.Are you considering selling your business? The sooner you bring in the right team, the smoother the M&A process can be. Contact Walden below to start planning.