4 Steps To Finding Your Sell-By Date / by Kerri
Most business owners assume that selling their business is a sprint to the finish-line, but the reality is it is more like a marathon. Whether you are prepared for it or believe it or not; it takes a long time to sell a business – if you want to command full value.
The sound of the starter gun sends adrenaline flowing as you leap forward out of the blocks. Within five seconds you’re at top speed and within a dozen your eye is searching for the next hand. Then you feel the baton become weightless in your grasp and your brain tells you the pain is over. You start an easy jog and you smile, knowing that you did your best and that now the heavy lifting is on someone else’s shoulders.
That’s probably how most people think of starting and selling a business: as something akin to a 4 x 4 100 meter relay race. You start from scratch, build something valuable, measuring time in months instead of years, and sprint into the waiting arms of Google (or Apple or Facebook) as they obligingly acquire your business for millions. When they hand over the check and you’ll ride off into the sunset. After all, that’s how it worked for the guys who started Nest and WhatsApp and many others – right?
Unfortunately, the process of selling your business looks more like a grueling 100-mile ultra-marathon than a 100-meter sprint. It takes years, a lot of planning and a lot of preparation to ensure you can make a clean break from your company – which means it pays to start planning sooner rather than later. Here’s how to backdate your successful transaction and transition to a reinvention to get started.
Step 1: Pick your sell-by date
The first step is to figure out when you want to be completely out of your business. This is the day you walk out of the building and never come back. Maybe you have a dream to sail around the world with your kids while they’re young. Perhaps you want to start an orphanage in Bolivia or a vineyard in Tuscany.
Whatever your goal, the first step is writing down when you want out, identifying why that date is important to you, as well as what you will do after you sell, with whom, and why.
Step 2: Estimate the length of your earn out
When you sell your business, chances are good that you will get paid in two or more stages. You’ll get the first check when the deal closes and the second at some point in the future — if you hit certain goals set by the buyer. The length of your so-called earn out will depend on the kind of business you’re in.
Earn outs these days average two – three years. If you’re in a professional services business, your earn out could be as long as five years. If you’re in a manufacturing or technology business, you might get away with a one-year transition period.
Estimate: + 1-5 years
Step 3: Calculate the length of the sale process
The next step is to figure out how long it will take you to negotiate the sale of your company. This process involves hiring an intermediary (a mergers and acquisitions professional, investment banker or business broker), putting together a marketing package for your business, shopping it to potential acquirers, hosting management meetings, negotiating letters of intent, and then going through a 60 to 90-day due diligence period. From the day you hire an intermediary to the day the wire transfer hits your account, the entire process usually takes six to 12 months. To be safe, budget one year.
Estimate: + 1 year
Step 4: Create your strategy-stable operating window
Next you need to budget some time to operate your business without making any major strategic changes. An acquirer is going to want to see how your business has been performing under its current strategy so they can accurately predict how it will perform under their ownership. Ideally, you are in a position to give them three years of operating results during which you didn’t make any major changes to your business model, financial structure or ownership.
If you have been running your business over the last three years without making any strategic shifts, you won’t need to budget any time here. On the other hand, if you plan on making some major strategic changes to prepare your business for sale, add three years from the time you make the changes. These could include such things as: a new accounting software package; a clean financials; or changes in cashflow, risk tolerance, operational quality, pricing, cost structure, market channels, etc.
Estimate: + 3 years (after changes implemented)
Figuring out when to sell
The final step is to figure out when you need to start the process. Let’s say:
- You want to be in Tuscany by age 50, your sell-by date.
- You budget for a three-year earn out, which means you need to close the deal by age 47.
- Subtract one year from that date to account for the length of time it takes to negotiate a deal, so now you need to hire your intermediary and commit to the sale process by age 46.
- If you’re still tweaking your business model – e.g., experimenting with different target markets, channels and models; you will need to lock in on one strategy by age 43 so that an acquirer can see three years of operating results.
It certainly would be nice to make a clean, crisp break from your business after an all-out sprint, but for the vast majority of businesses, the process of selling a company is a squishy, multi-year trek to reduce risk and maximize value. The sooner you start, the better.
So if you wanted to command full value and be out by age 50, and you’re 45 or 47 now, you may have to delay that sell-by date or tie down operations right now, and get started planning earlier rather than later.