This Is the Most Important Thing to Consider When Selling Your Business. (Hint: It's Not the Price.)
I’ve seen a frustrating trend play out recently.
Owners of small to medium-sized businesses give their lives to their work, and it’s my belief they should get back as much as they possibly can for all they’ve put in. But I can’t do that when I get a call not only after someone’s already decided to sell, but after they’ve already agreed to a deal — which nearly 10 of my clients have recently done.
I’ve written about the need to have a plan in place for exiting your business before, but this recent spat of calls made me realize it’s not just about having a plan. It’s about something both bigger and more basic.
When deciding whether it’s time to sell your business, you have to start by being honest with yourself.
How much should you sell your business for?
The truth most business owners don’t like to hear is that the overall value placed on your business is much less important than how the deal is structured. And I can only help those who’ve internalized this advice enough to know to call before they decide to sell.
Think of it this way: Would you rather sell your business for $10 million and keep $1 million, or for $7 million and keep $2 million? This seems like a question with a simple answer, but it’s difficult for most owners to consider selling their business for anything less than the highest perceived value.
Maybe it’s because they want to gloat over their competition, or because it’s pleasing to see a higher dollar amount on the sale price. The temptation to sell for a certain price, whether an owner is actually ready or not, is extremely powerful. I had a client who recently told me they were thinking about possibly selling in three to five years and were ready to start building an exit plan.
Great! Except they changed their mind less than four months later, deciding for an immediate sale before the business was ready and the plan was even put in place. The abrupt change cost them money because the business structure was not ready for optimized sale and the time period to make necessary elections had passed for that year.
This is significant money being left on the table. If a plan comes before a deal, half or more of what would otherwise be paid in taxes can be saved. Sure, there are some things that can be done after the fact, but those savings amount to pennies as compared to dollars.
How to come up with a selling plan
Developing that plan begins by asking yourself some really hard questions, and being brutally honest when answering. Otherwise, you can get stuck — stuck running a business you have no passion for and ready to sell to the first decent offer; stuck in a deal where you’re paying 20-50% more in taxes than you legally should; stuck with no plan when things don’t go as expected, which in all likelihood they won’t.
With those hard questions answered honestly, there are close to 100 different things that can be done to maximize the deal in your favor. Post-sale those options can be counted one hand.
Take a recent story in the Harvard Business Review. A family-owned manufacturing business followed the traditional succession plan of passing leadership duties to the eldest male in the family, and the other siblings became co-owners.
No one ever stopped to honestly think through whether the eldest son was indeed the best fit to become CEO. They didn’t talk about roles, job descriptions, or expectations. They didn’t consult with any outside advisors.
The result? Massive business losses, damaged family relationships, and multiple lawsuits, a series of outcomes that are arguably much worse than any loss in dollar value.
Now imagine if that same family had started honest conversation years prior. It’s the difference between having a Swiss army knife at your disposal versus a dull plastic spoon. As Dan Sullivan says, “All progress starts by telling the absolute truth.”
Know your ultimate goal for selling your business
If you want to progress toward your goals you have to start with an unfiltered understanding of what those goals really are. Being honest about what a sale or transition of business ownership will actually look like might be one of the most important things you’ll ever do for your business and for yourself.
It’s only when you’ve reached the unique truth for your business and your goals that you can start building a strategic plan that will get you there, and be strong enough to ignore the other distractions that will inevitably come your way.