These 4 Factors Will Determine the Biggest Payday of Your Entrepreneurial Career
Selling your business is more achievable than you think when you've set yourself up correctly.
Did you know that, for most entrepreneurs, over 50% of all the money they will make from owning their business comes on the day they sell it? Being your own boss is great and all, but there may come a day when you want to move on and find your next adventure.
These days, billion-dollar software companies aren’t the only businesses being acquired. In fact, investors are foaming at the mouth to buy businesses just like yours. Amazon-business acquirer Thrasio just became the fastest unicorn on record, and other acquisition firms like Boosted and Perch are scooping up well-oiled operations right and left. If your numbers are tight and right, a hefty payday could be right around the corner for you.
A record number of trademarks were filed last year, which means that more people are establishing businesses and brands than ever before. Some of these companies will go on to become unicorns, whereas many others will fail. But what about the ones in between that build a successful business and eventually get acquired? And what does your business need to have in place to be attractive to investors and get a good offer?
I have built, bought and sold over half a dozen companies myself over the years, and now spend my days advising other business owners on how to do the same. I recently wrote The EXITpreneur’s Playbook to scale this advice and teach more entrepreneurs the basics of positioning your small business for acquisition. EXITpreneurs are entrepreneurs who are willing to do what it takes to position their business for acquisition, and usually they’re invigorated by the bootstrap-grow-sell-repeat process.
If that’s you, it’s important to understand how business valuations work.
Know how a business gets valued
Dave Bryant from EcomCrew has a phrase I love: “Revenue is vanity, profit is sanity.” It’s easy to measure top-line revenue in business, and these numbers are often the ones touted in case studies and other fancy marketing assets.
But buyers aren’t concerned so much with revenue. They’re much more interested in profit. And profit takes a lot more oomph to accurately calculate. Buyers will also look carefully at cash flow and seller’s discretionary earnings (SDE). If selling your business is something you’d like to do one day, getting a quality bookkeeper is an absolutely essential piece of the puzzle.
At our firm Quiet Light Brokerage, we’ve worked with thousands of buyers and sellers over the years. In our experience, buyers are looking for four things when they consider purchasing a business — whether they know it or not. These four things, which we call the four pillars, are as follows.
If a business is less than three to five years old or is in a rapidly changing market, it carries a higher degree of risk. This is normal, and investors expect a younger business to be more volatile. If you have a young business and want to make an exit, you’ll want to ensure you have all the other pillars in place so that you can make a strong case. The factors considered in risk include a company’s size, age, competition and defensibility, which refers to how high the barrier of entry is for competitors to enter your market.
Why should someone hand their hard-earned dollars over to you in exchange for this business? Think carefully about your value proposition here. Also think about how you can make life easier for your buyer when they take over the steering wheel. Obvious metrics like top-line revenue and profit margin are important, but other factors like ease of transition receive more weight than you might think. If you’ve lined up new product SKUs that will generate big revenue in the years to come, that positioning is attractive to someone with regard to getting a solid ROI.
A sale is a transfer of goods. Can the buyer run the business in exactly the same way that you’ve been running it? The obvious snag here is companies built from a personal brand — no one else can be you, so if you are the business, you’ll have a more challenging exit and can expect to stick around and be the name and face of the business long after it is no longer yours.
There are other transferability factors to think about here, such as staffing, supply chain and workload. If it takes you 80 hours a week to run your business, a buyer probably won’t be up for that, which means they’ll have to outsource more of the work and increase cost and risk along the way. Make your position in the business as transferable as possible if you want to sell someday.
Every entrepreneur who aspires to be an EXITpreneur can start working on this today. A buyer won’t touch a business unless it has clear documentation and reporting. Financial documentation is obviously priority number one, but established standard operating procedures (SOPs) and contracts are also important to have in place.
Remember earlier when I begged you to retain a good bookkeeper? Another reason you need one is because most ecommerce businesses that get acquired use accrual accounting, not cash accounting. Accrual accounting gives a more accurate picture of actual business earnings, which is what investors will look for when they consider buying your business.
Selling a business can be intimidating, and many entrepreneurs miss out on one of the biggest paydays of their lives because they don’t ever take action on their exit strategy. Put these four pillars into action today, and a thrilling sale will soon be on the horizon.
Entrepreneur Leadership Network Contributor