In this episode: Every business eventually closes or changes hands. Jon Peyton returns to the difference between lifestyle entrepreneurs and value creators and shows how that choice affects family, employees and community, why building a best-in-class company puts the seller in control, and why so few businesses ever sell.
Key insights
- A lifestyle entrepreneur takes most of the profit out. A value creator reinvests to build something that outlasts them.
- When a lifestyle business closes, the owner may be fine, but employees, clients and vendors lose what they relied on.
- Value creators often sacrifice time with family early so the business can later run without them.
- Being best in class makes competitors and investors chase you, which can mean a premium price or better terms.
- By Jon’s estimate, fewer than 20% of businesses ever sell, and only about half of those sell on the seller’s terms.
Episode timeline
- 0:38 Thinking about the end from day one
- 1:59 Impact on family, friends, employees and community
- 3:56 What a lifestyle business looks like on paper
- 7:42 Who gets left behind when it closes
- 11:20 What a value creator does differently
- 16:21 Sharing the proceeds of a sale with employees
- 18:04 The benefits of a value-rich company
- 20:06 Why buyers pay a premium for the best
- 24:44 How few businesses actually sell
- 26:29 When the buyer sets the terms
- 32:07 When the seller sets the terms
- 35:21 Why different buyers pay different prices
The episode in brief
Two kinds of owners. A lifestyle entrepreneur uses the business to fund their life. Early on, that makes sense; you have to live. But as profits grow, many keep pulling everything out instead of reinvesting, so the business never grows past the point that supports their lifestyle. Jon sees owners taking anywhere from $25,000 to $500,000 a year this way, often with only a handful of employees.
Who it affects. A lifestyle business can be great for the owner’s family and friends while it runs. The trouble comes at the end. If there’s nothing to sell, the owner closes the doors and lives on savings, but employees who were loyal for twenty years have to find new jobs, and clients, vendors and community partners lose a resource they depended on.
The value creator. A value creator builds the business to last beyond them. They invest in employees’ training and growth, share success through bonuses or profit sharing, and work toward an owner-independent company. Early on, that often costs time with family and friends. Later, everyone benefits: the owner has time back, employees have more opportunity, and when it’s time to move on, the owner can keep the business with others running it, sell a stake, or sell it outright. Some owners even share part of the proceeds with the employees who helped build it.
Being chased. When you’re best in class, competitors try to copy you, which keeps you innovating into new markets, products and services. It also makes you a target. A competitor with complementary niches may pay a premium to buy you, or offer better terms, such as more cash up front and fewer contingencies. When you’re the one chasing buyers, they hold the power.
How few sell. By Jon’s estimate, fewer than 20% of businesses ever sell. Many are one-person operations with no systems, employees or marketing to transfer, so they simply close. Of those that sell, about half sell on the buyer’s terms: a lower price, or earn-outs tied to future performance. The rest, roughly 8% to 10% of all businesses, sell on the seller’s terms, sometimes with several bidders pushing the multiple up.
Why buyers pay more. Jon’s example: a business with $1 million of EBITDA valued at 8 times is worth about $8 million. A private equity buyer might invest another $10 million, grow profit to $5 million over five years, and sell at the same multiple for $40 million. Knowing why a buyer wants you helps you negotiate.
Key action items
- Decide which you are. Look at how much profit you reinvest each year and whether that fits the business you want to build.
- Build owner independence. List the decisions only you can make today and start handing them off.
- Benchmark yourself. Compare your company with the best in your niche and pick one area to close the gap.
- Think about your people. Consider how a sale could also reward the employees who helped build the company.
- Get a valuation view. Talk with Founder’s Accounting™ or an exit planner about what drives value in your business.
Listen next: Episode 37: How Entrepreneurs Prepare for the Exit
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.