"I sold my business" is a magical phrase for entrepreneurs. Just saying the words conjures up images of wealth, leisure and exciting new challenges. For many entrepreneurs, it's the goal, the reward, and the ultimate validation for years of struggle.
While selling out isn't every entrepreneur's objective, perhaps it should be, says Ned Minor, a transaction attorney in Denver and author of the book Deciding to Sell Your Business: The Key to Wealth and Freedom. "Eventually, every business owner will leave their business," says Minor, "either sitting down at the deal table, or feet first on a stretcher."
Let's face it; the idea of working until your last breath is not what got most of you into business for yourselves. And yet, if you aren't already planning a more graceful exit, you may end up with the one planned for you.
On Your Mark
It's never too early to start thinking about selling. "The day you start building a business is the day you should start designing your exit," says Minor, who has counseled thousands of business owners through the process.
Dan Freedman, a serial entrepreneur and now CEO of San Jose, California-based Jasomi Networks, agrees. He sees himself not as a software entrepreneur, but as a business builder. No matter what industry he's in or what product he makes, he says he's always in the business of selling his business. "If you view the company itself as the product and the acquirers as the customers, you're on the right track," he says.
After building and selling three different software companies, Freedman, 39, takes a very strategic view of business. "When you're starting or growing a company, it is always a huge amount of work," he says. "The only question is, Are you going to get a huge return, an OK return or a horrible return? Each outcome is possible from the same company."
Jasomi seems well-placed for a huge return: The company has grabbed a 40 percent market share and, according to Freedman, will post 2004 revenues "in the low eight digits."
Scale and Strategy
What does a salable company look like? It's salable if it's scalable, says Minor. Of course there are small-and-steady businesses sold every day, but the big bucks come looking for a business that has huge growth potential. "Every buyer thinks he's smarter than the seller-that he can double the size of the business," says Minor. "And we encourage him to think that." A business will fetch the best price only when buyers believe they can take advantage of significant future growth potential.
Selling a company's future upside means proving your previous growth and validating your future growth strategy. Start with two years of audited financials to show the veracity of your historical growth. Then be prepared to explain your business strategy and how it fits into the overall market. If your growth has been fueled by acquisitions, show the buyer how that works and how many more acquisition targets are still in the market. If your growth is through new product development, be prepared to reveal details of your R&D pipeline and your ideas for future product lines.
As an intermediary, and sometimes a buyer, Andy Agrawal stresses the importance of a strong, clear strategy. Agrawal, managing partner of VisionQuest, an investment banking firm in Fort Lauderdale, Florida, says that a strong strategy will attract an entirely different kind of buyer. He differentiates between "financial" buyers, who are looking at your income statement, and "strategic" buyers, who are looking at the overall value of your business.
"Financial buyers will typically pay a lower price-they'll have a fire-sale mentality," says Agrawal. "So you need to find strategic buyers and paint a picture for them. Show them a great customer relationship, a great piece of intellectual property, an advantage in time to market, or a key employee. Show the strategic buyer how one plus one equals three."
"You have to understand why an acquirer might want to buy your company," says Freedman. Big companies sometimes must act quickly in the face of market pressures or trends. "I've seen companies bought for many millions of dollars just to justify a press release...or to backfill for a previous press release that left an unfulfilled promise."