As the previous post focused on the changing needs of the company and the changing role of the CEO, in this post, I want to focus specifically on what it means to leave the company you started and grew. The two most common reasons for exiting a business are the sale of the company or retirement. Hopefully, if it is retirement, there is also a sale of some type, even if to relatives! In planning an exit strategy, it is essential to have a realistic goal that is backed up by sound justifications. Secondarily, it is vital to put the best face on the business before starting the sale or transition process. Lastly, emotional ties to the company need to be substantially limited or cut altogether. At this stage, your measure of success should be the value you can obtain from the business, not how it survives without you. Remember, you paid yourself a salary for the job you did day to day. Selling the company is your payment for originally investing it in and having owned it all these years.

If your goal for the business from day one was to sell it, not merely to have a business that supports your lifestyle, then the prep work for selling it should be pretty straightforward. You should have at least three years of clean, audited financial statements. You should have shown growth or profit for the last 3-5 years. You should have processes and procedures in place so that the business can operate with minimal disruption even if a key employee leaves. And you should have done your research about the valuation of comparable businesses.

Having managed a business sale for one of my clients, I can say that even seemingly well-organized businesses struggle to go through the due diligence process that is required by buyers. So the sooner you are ready, the faster the sales process will happen and the smoother it will go. For instance, having your finances audited is expensive and time-consuming, so most privately held businesses do it only occasionally or if required to do so. Having three years of audited books will minimize questions relating to finances for the buyer. After all the buyer is trying to learn as much as possible about both the pros and cons of your business in just a matter of months and with millions of dollars at stake they want to have a complete picture!

While buyers will look at business sales to get an idea of how well the products sell and estimate what the market potential is with the changes they will introduce, bottom-line profits will nonetheless have a significant impact on the size of the offer. In fact, the size of the initial payment for the sale will be most affected by the profit potential of the business. If the offer is a 30/25/25/20 deal over three years, the first number is almost never going to be higher than the profit potential of the company in one year. Most business sale offers are based on a multiple of EBITDA – Earnings Before Interest, Tax, Depreciation, and Amortization – and not on sales volume per year.

While EBITDA is not the best measure to grow your business, it is a really common measure when it comes to selling businesses. If you plan on selling your business, you should start looking at your EBITDA several years before the planned sale and decide if decisions today will affect the EBITDA numbers in the coming years. Bottom line net earnings don’t disregard things like taxes, interest paid, or depreciation. Measure if your business is making you money as the owner, and don’t simply start focusing on the EBITDA number to run the company. But do keep in mind that if a business loan can help to increase EBITDA numbers before a sale, then it may be a good idea to do so to increase the company valuation.

Of course, being a great CEO is hard work so having to deal with the sale of the business is best left to people who have the knowledge of the process and more importantly the time that it takes to find a buyer, go through the due diligence, and negotiate the best deal. In this instance, much as with my comments about commercial real estate brokers, I caution you to not completely trust a business broker to look out for your interests. Yes, they do get paid a percentage – usually 8- 10% – on the sale price of your business, but their desire to have you sell at a higher amount is often overshadowed by their desire to have you sell the business quickly. They are selling multiple companies every month, so their measure of success has more to do with the speed of churn on sales of businesses than getting the best deal for you.

I have been brought into several companies before a business sale; the largest was for ten figures and the smallest was for seven figures. In all cases being an independent consultant allowed me to keep any emotions out of the process, while focusing on negotiating the best deal for my client, working with a law firm to draw up sales contracts and related documents, and answering buyer questions without any bias as I had no ownership in the business. In effect I was in a position of being able to help the two parties negotiate with each other, trusting me to bring an unbiased perspective. Ultimately after being paid by the selling client for selling the business, I did work for both the seller and the buyer in the coming months to help the transition go smoothly.

If you can sell your business to your children or other relatives, congratulations! You have saved the cost of a business broker. But you should still plan on spending money for lawyers to draw up a legal contract and for the transition which will ensure that things go as smoothly as possible. Even if you sell to your kids, it is worthwhile to work with a professional to put together the transition plan and be sure that there are no surprises as you wind down your participation in the company.

If you are lucky enough to have the business stay in the family and get a single large payout for it, then you are in the ideal scenario where you can enjoy life and not worry about the business you sold. However, most people I have known who have sold their company to their children end up doing a payment plan over time. In effect acting as the bank for their buyer and receive payments over the course of several years. This may be more stressful than running the business because you are no longer making any strategic decisions in the company, but at the same time, your future payments rely on that business being successful and your relatives being able to afford to pay you on time. Consider what the consequences are if your relatives drive the business into the ground and are unable to pay you. Do you really want to get the assets of your business back at that point?

The bottom line is that selling a business is a full-time job. Much as the person who is his own lawyer has a fool for a client, the owner who thinks they can get the most money for their business by selling it without help is guaranteed to be leaving more money on the table than the cost of having someone sell it for them.

 

Excerpted From The Original

Beyond Sales: 50 Business Problems Every CEO Needs to Solve

Foreword by Roy H. Williams

Gene isn’t a journalist, but he is most definitely an investigator.
I was talking to a friend who employs about 250 people in 3 different companies when he mentioned that he had hired a specialist to figure out what was wrong with a company that was underperforming.
“Who did you hire?”
“A fellow named Gene Naftulyev.”
“He’s going to figure out what’s holding you back?”
“Yeah. He’s famous for it.”
“How famous?”
“Procter & Gamble. American Express. Kraft Foods. Target. They’re all clients of Gene’s.”
“What does he do, exactly?”
“He improves profits without spending money.”
“But how?”
“Process re-engineering, operational optimization, making business units autonomous, negotiating employee and consultant contracts and a hundred other things like that. It just depends on what you need. He refines the core of your business so that you become more efficient, have fewer frustrations and make more money. Naftulyev can always spot the problems and his fixes are famously quick and easy.”

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