With the right foresight and planning, a successful exit is possible for businesses of all shapes and size. But it’s not just about selling, it’s about selling at the price you want. Becoming aware of what makes a business saleable and what knocks dollars off the asking price can be the difference between you sailing off into the sunset and having regrets later down the line.
Joe Valley is a partner at Quiet Light, a leading mergers and acquisitions advisory firm, where Valley has helped facilitate over a billion dollars’ worth of exits. Since building, buying, and selling six companies of his own, including one through Quiet Light, Valley has mentored thousands of online entrepreneurs hopeful for an exit. Valley’s book, The Exitpreneur’s Playbook, helps online business owners get the maximum value and best deal structure when they seek their own exit.
I interviewed Valley about the five steps to take to maximize your business value upon sale.
Set clear goals
If you have only a vague idea of what you want to achieve from your business sale, how will you know when you have a great offer? Valley encourages the business owners he mentors to set goals. “Think about dollars, date and feelings,” he explained. “Take a blank sheet of paper and complete these sentences: ‘I will sell my business for [amount] in the [number] quarter of [year]. When I sell my business I will feel [three ways you will feel].’”
Once you’ve completed those sentences, stare at your responses and imagine the scenario coming true. This isn’t a fluffy exercise, it’s science. “Studies show that we become 42% more likely to achieve our goals simply by writing them down regularly,” said Valley. “When you add feelings to your goals your success rate can go even higher.” An answer such as “When I sell my business for $5,000,000 in Q1 of 2024 and I will feel unburdened because I’ll be out of debt, have more money in the bank than ever before and I get to spend more time with my family.” has emotion tied to it. This emotion will carry you through the ups and downs of entrepreneurship as well as the resilience and patience required for an exit.
Calculate seller’s discretionary earnings (SDE)
Now that you have your goal in mind, work out where you are and, therefore, how far you are away. Businesses are often sold based on seller’s discretionary earnings (SDE), defined as the total financial benefit that a single full-time owner-operator would expect to derive from a business on an annual basis. This means the business profit, plus perks and anything that you take out as the owner, plus any expenses that will not carry forward to the new owner.
Valley recommends you “do all your accounting on an accrual basis, so your numbers and therefore SDE are accurate. You should also calculate addbacks which might include travel expenses not required going forward, or any expenses that will not exist upon sale.” Valley also recommends getting expert advice here, from someone who “can look at your books and explain what you need to do and what constitutes an add-back. They will also spot things you might have missed.”
Shift your mindset
When gearing up to sell your business, mindset is key. Valley thinks it’s a false economy to build a business purely for the reason of selling it, and recommends the exitpreneur mindset happens later down the line, after you have created something another entity might want to acquire. “When you shift your mindset from entrepreneur to exitpreneur you go from trying to build and sell a business for maximum value, to trying to build a great business for a great buyer to take over at a great price.”
Having the perfect buyer in mind at all stages of growing and selling might affect how you make decisions, including the additional work you put in making your business ready to hand over. This includes identifying and improving on your business’ weaknesses, enhancing its strengths, and most importantly, gaining an objective viewpoint to be able to see your business through the eyes of a potential buyer. Valley explained, “the result will be a maximum value exit with great deal terms and a happy buyer to boot.”
The value of a business is set by market norms. Certain types of business command a certain multiplier on profit, revenue or SDE, and if you have just one buyer, your price is likely to reflect the going rate. Valley doesn’t recommend this at all. “If you present your business for sale to just one buyer, they will feel no pressure to offer you maximum value and a great deal structure.” Instead, generate some competition.
Once you have more than one interested party, the dynamic shifts. There is only one entity in supply but there is more demand, driving the price up and ensuring you get the best deal terms. Valley recommends you “present your business for sale to all potential buyers.” When you’re ready to sell, go out to the whole market in one go rather than courting buyers individually. This adds a compelling reason for buyers to put their best offer forward.
Understand the terms
So you’ve done the above and you’re holding a document known as the letter of intent or the heads of terms. Make sure you know exactly what you’re signing. “Learn about the nuances of deal terms so you get the best structure and sleep well at night after closing,” said Valley. Understand “what an earnout is, including the risks and potential rewards. Do I need to worry about a working capital peg? Can I roll equity forward and do I have to provide a seller’s note for my inventory?”
If those terms baffle you, get clued up before starting the sale process. Know what you’re prepared to give for each one, and don’t be caught by surprise in the last seconds of your deal closing. The more information you have, the more you can ascertain what you want and the more you can ask for it. Creating a brilliant business, ready to sell with a clear and fair asking price will mean you can maximize exit value and be rewarded for the years of hard work you have put in.