4 Steps To Finding Your Sell-By-Date
Most business owners think selling their business is a sprint, but the reality is it takes a long time to sell a company. The sound of the gun sends blood flowing as you leap forward out of the blocks. Within five seconds you’re at top speed and within a dozen your eye is searching for the next hand. Then you feel the baton become weightless in your grasp and your brain tells you the pain is over. You start an easy jog and you smile, knowing that you did your best and that now the heavy lifting is on someone else’s shoulders.
Unfortunately, the process of selling your business looks more like an exhausting 100-mile ultra-marathon than a 100-meter sprint. It takes months sometimes years and a lot of planning to make a clean break from your company – which means it pays to start planning sooner rather than later.
Here’s how to backdate your exit:
Step 1: Pick your eject date
The first step is to figure out when you want to be completely out of your business. This is the day you walk out of the building and never come back. Maybe you have a dream to sail around the world with your kids while they’re young. Perhaps you want to start an orphanage in Bolivia or a vineyard in Tuscany (I actually had a client do this, but in France).
Step 2: Estimate the length of the transition
When you sell your business, chances are good you will need to stay for a transition period. The length of time is dependent on the kind of business you’re in. If you’re in a professional services business, your transition period may be a year or more and likely will include an “earn out” agreement. If you’re in a manufacturing or technology business, you might get away with a lessor transition period. I think a fair estimate is 6-12 months in most cases and in some capacity. Estimate: + 6 Months
Step 3: Calculate the length of the sale process
The next step is to figure out how long it will take you to negotiate the sale of your company. Preparing a marketing package for your business, shopping it to potential acquirers, negotiating letters of intent, and then going through a 60 to 90-day due diligence period. From the day you hire an intermediary to the day the wire transfer hits your account, the entire process usually takes six to 12 months. To be safe, budget one year.
Estimate: + 1 year
Step 4: Create your strategy-stable operating window
Next you need to budget some time to operate your business without making any major strategic changes. An acquirer is going to want to see how your business has been performing under its current strategy so they can accurately predict how it will perform under their ownership. Ideally, you can give them three years of operating results during which you didn’t make any major changes to your business model. Note: If you have been running your business over the last three years without making any strategic shifts, you won’t need to budget any time here. On the other hand, if you plan on making some major strategic changes to prepare your business for sale, add three years from the time you make the changes.
Estimate: + 3 years
Figuring out when to sell
Now we can figure out when you need to start the process. Let’s say you want to be in Tuscany by age 60. You budget for a 1 year transition, which means you need to close the deal by age 59. Subtract one year from that date to account for the length of time it takes to negotiate a deal, so now you need to hire your intermediary by age 58. Then let’s say you’re still tweaking your business model – experimenting with different target markets, channels and models. In this case, you need to lock in on one strategy by age 55 so that an acquirer can look at three years of operating results. For the vast majority of businesses, the process of selling a company is a squishy, multi-year slog. So the sooner you start, the sooner you get to the finish line.