Successfully starting and growing a business can be a tough challenge for even the most adept entrepreneurs. Exiting a business for maximum profit, however, can prove even more difficult. Approximately 46% to 80% of middle-market sell-side transactions fail to close and, according to Forbes, 8 out of 10 businesses do not sell at all. While Seiler Tucker has one of the best closing rates in the M&A industry, our years of experience have given us insight into why this failure rate is so high. The first culprit can be attributed to the fact that business owners don’t plan their exit strategy from day one. Second, sellers are not aware of what buyers are looking for in a business or the characteristics that enhance a business’s value. Third, sellers wait to sell their business when it is trending down instead of when it is thriving. And lastly, sellers try to engage in the process alone and fail to align themselves with an experienced M&A Advisor who can help facilitate the transaction. Citizens Bank estimates that 46% of potential sellers fear being underpaid for their business. After all, attempting to monetize your life’s work can be a daunting task. Understanding the four concepts listed is the best way to ensure that your business doesn’t become part of this statistic and the key to selling your business for a maximum profit.
Most business owners don’t understand the importance of developing an exit strategy from day one. Therefore, they have to begin creating their strategy once the decision to sell has been made which can delay and complicate the process. Creating your exit strategy from day one allows you to time your exit and sell when your business is thriving. It also enables you to tailor your business to your ideal buyer. Business’s exits should be planned through a process known as the ST GPS Exit Model®. You need to determine your destination, know your current location, identify who your buyers will be, know your time frame, and determine your why. If the model is followed properly, not only can this increase the number of buyers that will be interested in your business, but it will also increase a buyer’s perceived value of your business and create a bidding war for your company.
There are certain characteristics that intelligent buyers are going to look for when purchasing a business. They want to see that a business is operating on all six cylinders. At Seiler Tucker, we call these cylinders the ST 6 P’s®. These six cylinders are quintessential to maximizing your value when it comes time to sell. They are as follows: People, Products, Processes, Proprietary, Patrons, and Profits. People refers to the management and employees that are currently employed by the business. Committed employees and tenured management teams can act as a value driver as they are directly involved with the direction and growth of your company. Products are the products or services that are offered by your company. Is your product thriving or dying? Does it have a niche or intellectual property? Do you have a diversified product or service mix? All of these factors can act as value drivers when it comes to selling your company. You should always design with the customer experience in mind. Processes refers to operating procedures and employee handbooks. If established and well documented, they can be used to demonstrate how efficiently and orderly a business is run, increasing what your business is worth. Proprietary refers to any intellectual proprietary such as brands, patents, trademarks, databases, processes, or contracts that are transferable. Assets such as these can act as one of largest value drivers of a company. For example, the brand Coca Cola is worth $79 billion dollars alone, a massive value driver for the overall company. Patrons refers to the customers your company serves. A diversified customer base can reduce cash flow risks and greatly increase your company’s value. Last but not least, Profits refers to the profit that your company is able to generate. EBITDA is the most important profitability metric to consider as many valuations are based on a multiple of this metric. Therefore, the higher your EBITDA is, the higher the price you can demand in the sale of your business. Keep in mind, profits are never the problem, they are always a symptom of not operating on all six cylinders. These six characteristics, the ST 6 P’s®, are pertinent to maximizing the profit from the sale of your business as they can affect the multiple used to value your business. To find out if your business is operating on all 6 P’s, visit www.seilertuckeracademy.com/st-6p/quiz/.
As mentioned in the second paragraph, it is important to sell your business when it is thriving. Selling under this condition ensures you will maximize its value. Generally, companies sell for either a percentage of revenues or a multiple of EBITDA. That being said, it makes sense that when business is booming, your valuation will be higher. Also, not many buyers are looking to buy a business that is on a downtrend. There are more buyers for good businesses than there are good businesses to buy. These buyers want a business that is already profitable so they can recoup their investment and begin making money as soon as possible. Even if you did find a buyer interested in an underperforming business, often called a Turnaround Specialist, it would be impossible to maximize value. The timing of the sale of your business is just as important as your exit strategy and the characteristics listed above. This is why you should AIM: Always Innovate and Market.
Finally, hiring the right M&A Advisor to guide you through the process can help in achieving a maximum profit. An advisor has access to a much larger pool of potential buyers than a seller would on their own. They can help market your company, qualify buyers, and provide insight into what value drivers you can incorporate into your valuation. An experienced advisor can help you understand what your company is actually worth and decrease the chances you will have of a deal falling apart.
Selling your business for a maximum profit is an art, not a science. There are many different components to consider, all of which can have a huge impact on the value you can command for your company. This article provided a brief insight into some of the most important factors into maximizing the value of your business. If you are interested in learning more about selling your business for a maximum profit, visit www.exitrichbook.com to pre-order your copy of Exit Rich® so you can learn insider secrets and fully understand how to Exit Rich®.
Michelle Seiler Tucker is the author of “EXIT RICH: The 6 P Method to Sell Your Business for Huge Profit“ and the Founder and CEO of Seiler Tucker Incorporated. She has sold hundreds of businesses to date and currently owns and operates several successful businesses. She is a leading authority on buying, selling, and improving businesses, as well as increasing business revenue streams. A formidable force in her industry, Michelle closes 98% of all offers she writes and, on average, obtains a 20 to 40% higher selling price for her clients.