Planning Your Business Exit
As many companies who struggled through Covid-19 realized, the most important components of any business at time of sale are predictable revenue, profits and liquid cash. Here are the immediate steps any business owner should consider as they plan for an exit:
1. Convert Your Clients to Longer Term Contracts and Create a Repeatable Sales Process
Predictable revenue allows a buyer to easily estimate when they will recoup their investment in buying your business. If your books don’t demonstrate profitable growth secured by multi-year engagements, your business is worth about the equivalent of your previous years’ net income. While your month-to- month billing may be a selling feature for clients, it’s a big red flag to buyers who won’t be guaranteed that your clients don’t leave when you do.
- Your first step towards a higher company valuation upon exit is converting your break-fix clients to managed clients.
- Then, move your month to month managed services clients to agreements with longer engagement terms.
- Finally, demonstrate your ability to add new, profitable clients every month. Adding 20% or more to your top line annually (while minimizing attrition and maintaining your margins) is a good number to strive for. It shows steady, planned, repeatable growth – much more attractive to a potential buyer than wildly inconsistent feast/famine years.
2. Clean up your P&L
A higher level of profitability means higher values, as the purchaser will see how they can eliminate some headcount (yours included) and remove duplicate cost centers (like accounting) then combine other spends for more favorable terms from shared vendors. If you have traditionally been a lifestyle business, or you use your business for personal expenses regularly, it’s time to begin sorting out your personal business from actual business.
Nobody is going to judge fellow entrepreneurs for writing off their Pelotons or their wine cellars. Most buyers will understand your interest in using your business to your advantage, but you’ll want to be able to clearly demonstrate to your buyer the line items that leave your P&L when you leave the business. If your business leases your cars, pays your home internet bill, or paid for your last vacation, choose one bank account or credit card that you use only for purchases that you’re only able to charge to the business because you are the business owner.
3. Get the Benjamins
The final step in getting your finances right in preparation for sale is paying yourself an industry standard CEO salary. Your profit margins aren’t real if 100% of them would be necessary to hire someone to replace you. Don’t be a martyr, pay yourself first.
The person acquiring your business needs to budget to replace you, and there’s no point in them acquiring a business that drops in profitability when they need to add headcount.
The Importance of The Rainy Day Fund
Liquid cash gives you choices. Having a significant amount of operating capital saved and available means you or your estate can be patient in finding a buyer, taking the best deal instead of the first offer.
Not all exits are joyful. We don’t generally get to read about the poor ones. We don’t celebrate the failure of a fellow entrepreneur, so the less-than-exciting stories never get published.
There are more quiet failures than there are triumphant 10x exits. Here are two great resources if you’d like to consider new ways of managing your business towards a more attractive exit:
- The E-Myth – Michael Gerber: A great primer for those who haven’t been able to extract themselves from the day-to-day, but would like to do so.
- Profit First – Mike Michalowitz: Learn how to change your business and begin paying yourself first.