When it comes to selling your business, there are several strategies at your disposal to make it more appealing to potential buyers and increase the sales price. You can solidify your financials, eliminate lingering recurring expenses, clear out old inventory, offer seller financing options, and enlist the expertise of a business broker to find the ideal buyer and negotiate favorable terms.
These are all helpful and will help increase the value of your business. However, there is one fundamental shift that you, as the business owner, need to navigate to ensure a successful acquisition: removing yourself from the equation before selling.
Shifting from Hands-On Owner to Strategic Operator
Successful business owners are driven individuals who dedicate long hours, oversee every aspect, and wear multiple hats to ensure the business thrives. While this level of dedication is commendable and necessary during the growth phase, it can have a negative impact on the business’s value and selling price when it’s time to attract buyers. If you ask any experienced business broker for their top recommendations to owners planning to sell, you’ll likely hear variations of “step away from daily operations.” Suggestions like “delegate everything,” “transition to an absentee owner,” or “make yourself redundant” all emphasize the importance of shifting your mindset and considering the perspective of an investor.
Selling a Business, Not a Job
Prospective buyers evaluate business operations and financials based on the expected return on their investment. The valuation of your business will heavily depend on a multiple of projected earnings. While the concept is straightforward, the multiple applied by buyers varies depending on the efficiency of the business. Buyers are interested in acquiring cash flow, not necessarily the job itself. For instance, if your business generates $200,000 annually but requires your full-time commitment of 60 hours per week, it’s unlikely to fetch more than one to one-and-a-half times earnings ($200,000-$300,000). However, if your employees handle day-to-day operations, allowing you to focus on strategic growth, that same business with the same earnings may be valued at $500,000 or more.
Preparing for Your Exit While Still in Control
If you’re contemplating retirement or planning to exit your ongoing business, it’s wise to remove yourself from the forefront ahead of time. Begin training key employees to manage operations independently. Identify areas where you can delegate time-consuming tasks and recurring work. From a financial standpoint, it might be beneficial to promote a key employee to a managerial position, even if it affects your annual earnings. This approach not only reduces your reliance on the business but also engages your crucial employees, preventing them from leaving during the transition. Your business doesn’t have to run on autopilot, but the less it relies on you personally, the greater the chances of closing a sale at an optimal price.
Adopt the Buyer’s Perspective in Your Exit Planning
Effectively selling your business requires a different mindset from the one that drove its success during your ownership. As you prepare to step away from the business you’ve built, it’s crucial to shift your perspective and consider things from the buyer’s point of view. By adopting this viewpoint, you can make informed decisions that align with the buyer’s expectations and ensure a smooth and lucrative transition of ownership.
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