Exit Planning and the Five Ks: Crucial Details to Know Before Selling Your Business
Janitorial business owners have put blood, sweat and tears into building their businesses. Most have created a detailed plan — a vision of what they hope to accomplish while owning a business. Yet all good things must come to an end and, at some point, it’s time for the next chapter of life to begin.
Have you thought about your exit plan? In order to maximize the value of your business in a sale, it’s important to understand what I call the five Ks.
1. Know What Your Business Is Worth
Typically, the largest asset owned by a business owner is their business. Many people ask me:
- How much is my business worth?
- What multiple should I sell my business at?
There is no simple formula or quick answer. Each business is unique and back-of-the-envelope math is rarely accurate. The only way to know what your business is worth is to invest the resources into a comprehensive business valuation that will analyze your assets internally, as well as compare it to other comparable companies that have recently been sold.
2. Know What Motivates Buyers
There are three primary types of buyers:
- Large companies
- Private equity groups
- Private individuals
Each buyer has their own strategic objectives and a unique perception of value. It is extremely important to know how to present your business in a way that will align with a buyer’s motivations. Understanding these buyers’ perspectives can help you negotiate a better deal.
3. Know When to Sell
I find it funny that when a professional athlete is in a contract year, they typically end up having the best year of their career. They go into free agency and find a team willing to overpay on their next contract.
Using the same analogy, if your business is thriving, now is the time to sell it to maximize its value. There are three factors to consider when selling your business:
- Personal timing
- Company timing
- Market timing
The natural tendency is to base your decision on personal timing — e.g. when you want to retire or when you are forced to sell due to illness, divorce, etc.
I cannot stress enough — personal timing is the least important factor.
Buyers do not care that you want to retire, but they do care if your business is growing. Likewise, the market won’t be hot just because you want to sell, but you can choose to sell when the market timing is right. John Elway and Ray Lewis each retired the year following Super Bowl victories. They could have played another season, but each knew they had the opportunity to go out on top and did just that.
4. Know the Difference Between Price and Terms
The obvious goal of every business owner is to sell their company for maximum value. Unfortunately, too many owners only focus on the deal price without properly considering the deal terms.
This can lead to disappointing (even disastrous) results. Consider two offers for the same business:
- Offer A: $10M paid all in cash at closing.
- Offer B: $10.5M paid out over 10 years.
Without understanding the terms, there appears to be a significant gap between the two. However, depending on how the $10.5M deal is structured, the seller may not collect the full $10.5M and may end up worse than if they had accepted the “lower” offer.
Overall, there are many ways to structure a deal for both parties. The more flexible you are as a seller, the more likely you will reach a positive outcome.
5. Know How to Manage the Deal Process
It is imperative to know and understand the steps in the deal process. Every deal is different, but on average it takes roughly six to 12 months to sell a business.
There are four keys to the deal process:
- Preparation
- Marketing
- Deal structuring
- Closing
We all know that practice and preparation are the key ingredients to win in sports, and the same applies to a successful sale of your business. If the preparation is done correctly, all other portions of the deal process will flow smoothly.
Final Thoughts: Get Professional Help (From an Advisor)
Having a third party help you prepare your business for sale and represent you with no emotional connection to your business can boost your retirement income. If you’re like most people, you’re counting on your business to fund your retirement. But remember this: Selling a business is a lot like cleaning. Everybody knows how to do it to a certain degree, but only a select few truly excel and produce astonishing results.