In this episode: Exit planning is the last leg of the business’s journey. Jon Peyton covers three reasons owners sell, why you need to know your number before an offer arrives, and the three parts of preparing for a sale: due diligence, finding the right buyer, and building the right team of advisers.
Key insights
- Owners usually sell because they’ve reached their limit, found a better opportunity, or come to the end of the journey.
- Know what your business is worth and how much you need after tax before an offer arrives.
- Due diligence starts with an internal audit of every part of the business, plus a clear story about untapped growth.
- Financial buyers focus on returns. Strategic buyers may pay more for synergies.
- Advisers can cost 1% to 10% of the sale price, but a higher multiple can more than cover it.
Episode timeline
- 0:35 What exit planning really is
- 3:00 Reason one: you’ve reached your limit
- 4:03 Reason two: another opportunity
- 5:22 Reason three: the journey is over
- 7:25 A seller who didn’t know their number
- 11:55 Preparing the business: due diligence
- 14:56 Showing buyers untapped growth
- 18:10 Financial versus strategic buyers
- 23:11 When a financial buyer is also strategic
- 24:30 Hiring the right team
- 26:51 Your financial planner, CPA and attorneys
- 28:57 What advisers cost
- 29:58 Why the fees can pay for themselves
The episode in brief
The last leg. Many owners think of exit planning as M&A or investment banking. That’s part of it, but it’s incomplete. If value creation builds the business, exit planning prepares it for sale: making sure the company looks its best from the outside and holds up when a buyer looks inside.
Three reasons to sell. First, you’ve taken the business as far as you can and someone else could take it further. Second, another opportunity excites you more, and staying while your passion fades can hurt the company and its people. You might put a manager in place and hold it as a portfolio company, or sell and fund the next venture. Third, the journey is complete and you’re ready to hand off, whether to family, employees, or a financial or strategic buyer.
Know your number. Jon describes a business owner, a few years from retirement, who received an unsolicited offer. Once word got out, other bidders appeared. The owner had no idea whether the seven- and eight-figure offers were good, or how much they needed after tax to take care of family and others. After analyzing each bid, the team could tell the owner what price would work, and that a serious buyer would likely pay it. Don’t let an offer arrive before you know what a realistic price looks like.
Due diligence. Start with an internal audit of the major areas of the business, including strategy, financials, legal, sales and marketing, operations and people. Where something isn’t best in class, fix it or show why it isn’t a weakness. For example, if you have no formal executive team, show the trained managers ready to step up. Then document the growth you’ve chosen not to pursue, like products clients keep asking for, and explain why. A buyer can price that opportunity in.
The right buyer. A financial buyer, such as a private equity firm or family office, looks at whether it can grow the business and sell it later at a larger value. A strategic buyer looks at market share and synergies, such as cost savings from your systems, and may pay a premium. Some private equity firms act strategically by combining companies, but they rarely pay above market unless the business is best in class.
The right team. Your team may include a corporate or M&A attorney, an exit planner, a value growth advisor, a CPA, your business insurance agent, a CFP® professional who shows what the sale means for you personally, and an estate planning attorney. Larger deals often add an investment banker or business broker to run a confidential process. Fees can run 1% to 5% of the sale price, and as much as 10%. Jon’s math: $1 million of profit at 6 times is $6 million, while at 10 times it’s $10 million. Even after paying $1 million in fees, you’d walk away with far more.
Key action items
- Name your reason. Write down why you’d sell and what you want to do next.
- Calculate your number. With a financial planner, work out how much you’d need after tax to fund the next stage of life.
- Run an internal audit. Rate each major area of the business and list what a buyer would question.
- List untapped growth. Note what clients ask for that you don’t offer, and why.
- Assemble your team early. Line up an exit planner, CPA and attorney before an offer arrives. Founder’s Accounting™ and C-Suite Planning™ can help on the business and personal sides.
Listen next: Episode 38: The Evolutionary Step for Every Entrepreneur
Value Creation Consultancy™ has since merged into Founder’s Accounting™.
This episode is educational and isn’t legal, tax or financial advice. Speak with your own attorney and advisers about your situation.