Learn why having the RIGHT exit strategy is critical to leaving with the best deal in your pocket
I once knew an entrepreneur who had founded and built a successful manufacturing company in the telecommunications industry. She worked hard at her company for 12 years, achieving consistent growth in her revenue and earnings nearly every year. And she had a portfolio of intellectual property and technology that was poised to disrupt her industry.
One day, out of the blue, she received an unsolicited offer to buy her company from a private equity firm. The offer looked good, she thought, and the buyer promised to close the deal quickly, which was appealing. So the owner worked with her lawyer and tax accountant and accepted their offer without much hesitation. To an outsider, it probably looked like a win-win situation.
I didn’t hear about the sale until after it was closed, but out of curiosity, I did a bit of digging. A quick analysis of recent comparable transactions led to a shocking but all too common discovery.
Turns out, the owner had sold her company for something around half of what it was worth.
Why would she leave such a fortune on the table?
In my work as a Mergers and Acquisitions advisor, I see variations of this situation happen over and over again. In fact, most businesses either sell for less than they should or fail to sell at all.
A large part of the reason is fairly obvious: entrepreneurs are experts in running and growing their businesses, but most often don’t have a single clue about the process of selling (unless, of course, they’ve been through the process before).
The expertise that entrepreneurs develop in their field can mislead them to believe they’re able to navigate anything — including an exit — and as such, they embark upon their exit journey without the right knowledge or plan to ensure they succeed.
And the consequences can be severe: failing to effectively market the business to an international audience of targeted buyers, unsuccessfully establishing a competitive bidding environment, selling the business for far less than it’s worth and underestimating the emotional toll the process can take on everyone involved.
But it truly doesn’t have to be this way.
With the right knowledge, planning and guidance, you can ensure you achieve the maximum result — however you define it — when selling your business.
Let’s take a closer look at three common ways so many entrepreneurs fail, so that you don’t have to.
3 common reasons so many entrepreneurs fail to sell their businesses optimally
1They fail to understand the rules of the game before they make their first move
Albert Einstein once said that “You have to learn the rules of the game. And then you have to play better than anyone else.”
When it comes to successfully selling your business, I prefer to apply a slightly altered version of Einstein’s thoughts:
“Learn the rules of selling a business before you get started. Then apply your newfound knowledge to develop, implement and execute the most effective selling strategy for your business.”
Seems like common sense, right? And yet, so many entrepreneurs stumble here, making poor decisions based on a lack of understanding, or jumping in with both feet without knowing what the process involves and how to optimize it.
I can’t emphasize enough how important it is to arm yourself with the essential knowledge you’ll need before you get started on selling your business. Understanding the exit process allows you to create and follow a logical and ordered roadmap that will guide your success by ensuring you address all of the critical elements needed for a positive outcome.
As you dive in, you’ll quickly realize how complicated it is to sell a business, and how risky every decision you make can be to the ultimate outcome. But by expanding your knowledge at the outset, you’ll gain the necessary skill-set and wherewithal to ensure you make the best choices from the very beginning of your exit process.
2They focus on the wrong question: ‘what’s my business worth?’
Believe it or not, your business’ valuation is mostly irrelevant when it comes to the sales process.
You can ask any business valuation expert, investment bank or M&A advisor to help calculate your business’ value, but more often than not, it won’t equate to what you’ll end up with when the deal has closed.
That’s because valuation can be calculated, but price is ultimately negotiated.
And it really doesn’t matter what analysis you have in hand, even if it’s been produced by one of the big 4 accounting firms or a leading investment bank: if nobody is prepared to pay that amount, then you most certainly won’t sell your business for that amount.
A calculated valuation doesn’t carry much weight unless an investor agrees with that assessment. In other words, the price tag on your business is subjective.
Every buyer’s circumstances, background, experiences and considerations are different, and all of those factors will determine what value they see in your business. Which is why two different buyers may propose two VERY different offers. And they’ll make those offers based on what transpires during the negotiation process.
The surest way, then, for you to achieve the highest possible offer of your company is this:
Create a competitive bidding environment.
The more parties you’re engaged in negotiations with, the greater the opportunity for your advisor to determine the highest price the market is prepared to offer you for your business today. And that is what your business is worth.
3They fail to recognize the emotional roller coaster of selling their business
Selling a business is emotional. You’ve invested years – decades even – into building something you’re likely very proud of. Something successful enough that someone else would want to buy it. Selling it can feel like letting a piece of your very self go, and many business owners attempt to avoid getting caught up in the emotion of it all by simply not thinking about the sale until they have to.
I want to ensure that you’re prepared – not only organizationally, but also mentally and emotionally. Because a lack of thoughtful planning can turn what should be a fruitful process into a big missed opportunity. And a stressful one at that.
Business owners who enter into the selling process without a carefully thought-out exit plan may find themselves unexpectedly anxious, angry or frustrated, which can take a toll on their health, their family and loved ones, and on their business.
I want you to go into your selling process with your eyes wide open, feeling confident in your knowledge and preparation so that you have the greatest opportunity to realize a successful sale.
A well-constructed exit plan gives you that confidence. And it can give you leverage with a potential buyer, because it shows not only that you know your business, but that you’ve got your affairs in order.
But it isn’t something you can create overnight, which is why you should start working on one now, before the pressure is on.
Start planning your exit strategy before initiating the process of selling your business
Effective exit planning can take months — even years — to get all the pieces in place. So don’t wait until you have an offer on the table. Get started now. Educate yourself on the process of selling a business, understand what’s involved and where so many go wrong, and build up your exit confidence.
In other words, arm yourself with the confidence, clarity and direction that comes when you know the rules before getting in the game.
Then you’ll be in a far stronger position to ensure that you and your business are prepared for the exit process, that you’ve constructed the right team around you, hired the best advisors that are right for you, and have a clear sense of the most effective strategy for selling your business.
Put yourself in the driver’s seat when it comes to selling your business. When it’s all said and done, you’ll be glad you did.