Optimizing Your Business Exit- Part IV
In Parts I, II, and III, we discussed various factors that play into the value your business, or the value some of its component parts, can have when it’s time to sell. We also gave some thought that you need to put yourself into the shoes of a potential buyer to ensure that you are crafting something which is attractive and valuable to the buyer, not just shiny in your own eyes. (These factors, by the way, apply equally even when you have realistic plans for a generational transition — if it’s your kids or your employees who will take over to enable you to retire, there’s all the more reason to plan well and execute well.)
If your business is the “you plus others” model, the idea is that you should be able to slip out of the driver’s seat and let someone else drive it away, comfortably and safely. If your business is “just you”, and it is likely that your value will come from the sale of components, then you need to pay special attention to both the safety and the value of those components.
The best test for readiness to sell a “you plus others” business is that you can go on a two month vacation and come back to find everything is ticking along just fine. If you wouldn’t even dream of going away this long, you’re not ready to sell.
The focus in the “just you” business is on the value components, assets which are valuable and attractive to a buyer because they can use this asset to make money. Your secret recipe for a sauce which has sales exceeding ten million a year would be of high interest to many food manufacturers, your patent for a whirligig that creates electricity in a still, dark room will have buyers knocking down your door. You did bother to get a patent, right?
It pretty well goes without saying, then, that no matter your business model, getting to this stage takes time, care, attention, and often many false starts before you get it right. That you need to “begin with the end in mind” is obvious, or at least should be.
Building the team? Start early, build with purpose, promote your most talented people to leadership positions, have clear, sensible, documented procedures which are actually followed, and make sure all your people can operate safely and happily without your hovering over their shoulders. Every morning, ask yourself, “If I got hit by a bus, would this place keep on running just fine?”
In the “just you” model, the valuable pieces are things like client lists, inside supplier contacts, methods, recipes, and branding, all things which often take a lifetime to develop and perfect. Unfortunately, these things can be lost or destroyed in a day, which is why it’s critical that you protect them by way of patent, trademark, and confidentiality agreements.
In either case, it now becomes clear that it takes years, often a lifetime, to build out these things of value. Client lists take decades to grow, trust me.
And if all these things are all long-term projects, the answer to the question, “When should I begin to prepare my business for sale?” becomes obvious: today.
But there’s an additional consideration, often forgotten until tripped over at the time of sale, and that’s tax. Sorry, but that’s just reality. Generally speaking, the sooner you optimize for tax minimization at the time of sale, the better. Some things absolutely must be done at least two years before you sell, but as a general rule, the sooner you lay down tax-optimized structures, the better you will like the ultimate outcome.
This is equally true whether you are selling as a going concern, of perhaps just selling your patent. “He who hesitates is lost” may be a bit dramatic, but certainly the seller who leaves everything to chance at the last minute is simply handing gobs of perfectly good money to the tax man.
There’s one last reason for being well prepared to sell: it impresses the buyer. If it’s clear to the buyer that you have all your ducks in a row, and have always had things that way, it is the most encouraging sign you can give that your business or its key assets are of solid value.