Selling Your Business

Exit Strategy

Every story needs a great ending and every business needs a great finish too. We call this “finish” your exit strategy.

As a successful entrepreneur you get to choose any of these three main exit strategies:

1. You can sell the business and move on to your next great adventure.
2. You can scale the business to the big time.
3. You can passively own the business, with a greatly diminished role for yourself in its daily operation.

This is a subject that I plan on focusing on over the next few weeks, and today I want to dive into selling your company.  To be more specific, today I wanted to give an overview of the 5 main types of buyers for your business, and the three most important “next steps” you can take to prepare yourself to sell.

Let’s start off with the 5 main types of buyers for your business (notice I’m assuming that at the time you sell it your company will have reached Level Three.  This means it has strong systems, a winning management team, and intelligent internal controls in place to be independent of you or any other key player.

5 Types of Buyers for Your Level Three Business

Strategic Buyers

Strategic buyers look at your business and want to buy it as an operating entity. They want to maximize its value to them after buying it. Usually, this means they want to integrate the business into their existing business frame. This might mean buying your business for assets such as a patent or other technology or trade secrets, for the value of its brand, or for your customer list and relationships.

A strategic buyer could be a competitor, a key customer, or a large vendor, or it could be a new entrant looking to buy into an advantageous position in your industry.

Generally, you’ll get the highest price from strategic buyers because they have the opportunity to reduce overhead after the sale by consolidating your business into theirs. They also tend to have the best knowledge and experience to maximize your business afterward, plus they have a high comfort level with your industry, product line, and customer relationships.

Private Equity Buyers

Private equity buyers are looking at your business as a financial investment with their eyes squarely on “ROI” (Return on Investment). These private equity companies are generally only interested in buying if they can see a clear way to get out of the investment profitably within a three- to five-year time horizon.

MBO—Management Buy Out

This is when the top managers in your company team up to buy you out. Typically, they put up a portion of the purchase price themselves and then find outside investors or financing to cover the remainder of the purchase price. This type of sale tends to be less disruptive to your employees because the management team in place remains essentially the same after the sale.

ESOP—Employee Stock Ownership Program

This is a special type of sale of the business to its employees. Strong tax incentives support this type, but generally you’d receive the lowest price of all the options if you choose this one.

Going Public

One final way to sell your business is to sell it to the public through a public stock offering. For example, my friend Jeff helped take Priceline.com public in March of 1999. Currently, Priceline.com has a market value (called its Market Cap) of over $9 billion!   The reality is going public isn’t really a technic to sell the company so much as it is a technic to raise capital.  Yes you can sell your shares on the open market, but there are “lock-up” provisions that put strict limitations on how inside leaders of the business (read YOU) are allowed to sell their shares.

3 Steps to Take Today to Sell for Top Dollar Tomorrow

If you think your exit strategy is to sell, the most important question you can ask yourself is this: “What can I do today to prepare to sell my business two to three years from now?” Here are three concrete steps to follow as you prepare now to sell later.

Step 1: Determine what your business is currently worth.

How do you find out what your business is currently worth? You can look to industry or association sources for the most common valuation methods for your type of business. You can hire a valuation firm, work with an investment banker, or even hire a CPA experienced in your industry and type of business. Even more important is understanding how companies in your industry and business category are valued by the market. What formula is most commonly used? What is the current range of business multipliers and how can you command the top end of that range? Find out!

Step 2: Do a “buyer’s audit.”

Put yourself in the shoes of a potential buyer and take a hard, long look at your business. Which elements give it value in an outsider’s eyes? What major risks do you see that scare you? What are the most attractive parts of buying this specific business versus one of its competitors? What are the least attractive parts of buying it? If you could change only three things to make it more attractive as an acquisition, what three specific things would you change over the coming 12 months?

Step 3: Mitigate risks and enhance value.

Once you’ve identified key risks (see the following Six Key Risks) and specific elements that create value, take preemptive action to lessen the buyer’s risks and enhance your business’s value. The more you mitigate risks and enhance value in the eyes of a future buyer, the more your company will be worth when you sell it.