Some business owners mistakenly believe that selling their company is a quick process, similar to a running a sprint. However, selling a business is more like a marathon, requiring significant time and careful planning.
Think of starting and selling a business like running a 4 x 100-meter relay. You might imagine beginning your company, rapidly building value, and then quickly passing your baton to a large corporation, family member(s), internal employee(s), or external buyer. This allows you to receive a hefty check and run off into the sunset. But reality is different. Selling a business resembles a grueling 65-mile ultramarathon more than a 100-meter dash. It can take years and meticulous planning to smoothly exit your company, so it’s crucial to start preparing early.
Below are the steps to plan your exit strategy:
Step 1: Set Your Exit Date
Decide when you want to be completely out of your business. This is the day you leave and never return. Whether you dream of sailing around the world with your kids or starting a vineyard in Tuscany, it’s important to write down your target exit date and the reasons behind it. Include what you plan to do after selling, who you’ll do it with, and why this date matters to you.
Step 2: Estimate Your Earn-Out Period
When you sell your business, the payment often comes in stages. You’ll receive the initial payment when the deal closes and subsequent payments if you meet specific goals set by the buyer. The length of your earn-out period depends on your industry. The average earn-out period is about three years. In professional services, it could extend to five years, while in manufacturing or technology, it might be as short as one year.
Step 3: Calculate the Sale Process Duration
Determine how long it will take to negotiate the sale of your company. This process involves hiring an intermediary (such as a mergers and acquisitions professional or business broker), preparing a marketing package for your business, presenting it to potential buyers, hosting management meetings, negotiating letters of intent, and undergoing a 60 to 90-day due diligence period. Depending on your industry, the entire process from hiring an intermediary to receiving the payment takes 12 -18 months. To be safe, allocate two years.
Step 4: Plan Your Strategy-Stable Operating Period
Allocate time to operate your business without making significant strategic changes. Acquirers want to see consistent performance to predict how your business will fare under their ownership. Ideally, provide three years of stable operating results without major strategic shifts. If you’ve been running your business without changes for the past three years, you won’t need additional time. However, if you plan to make major changes before selling, add three years from when you implement those changes.
Step 5: Determining When to Start the Process
The final step is to figure out when to initiate the selling process. For example, if you aim to be in Tuscany by age 60, and you expect a three-year earn-out period, you need to close the deal by age 57. Subtract two years for the negotiation period, meaning you should hire your intermediary by age 55. If you’re still refining your business model, ensure you finalize your strategy by age 52 to provide three years of stable operating results for potential buyers.
Although it might seem appealing to make a swift exit from your business, the reality for most companies involves a lengthy, multi-year process. Therefore, the sooner you start planning, the better prepared you’ll be for a successful transition.
Questions? At Haefele Flanagan, we have M&A specialists along with complimentary assessments that measure your personal and financial readiness, as well as the 8 key drivers of business value. Reach out to Beth Renga, Director of Consulting Services, to learn how we might help you cross the finish line.
