Not sure when to decide to sell your business?
Most business owners think selling their business is a 100 meter sprint, but the reality is it takes a long time and is more like a marathon. It takes years and a lot of planning to make a clean break from your business – which means it pays to start planning sooner rather than later.
Step 1: Pick your exit 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 and jotting some notes as to why that date is important to you, 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, it’s likely you will get paid in two or more stages. You’ll get the first cheque 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. The average earn out these days is 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 business. 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 buyers, 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 funds 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. A buyer 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 can give them 3 years of operating results during which you didn’t make any major changes to your business model. 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. Estimate: 3 years.
Step 5: 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. 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 by age 46. Then let’s say you’re still tweaking your business model – experimenting with different target markets, channels and models. In this case, you need to lock in on one strategy by age 43 so that a buyer can look at 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 business owners, the process of selling their business is a messy, multi-year slog. So the sooner you start the better.
For further help or advice, please contact Neil Large
Please note this information is provided by way of example and may not be complete and is certainly not intended to constitute legal advice. You should take bespoke advice for your circumstances.