Don’t Let This Stop You From Selling Your Business
Are you getting ready to sell your business and retire?
Do you want know what will prevent you from selling?
If you’re like most business owners, the amount you receive when you sell your business will determine your lifestyle during retirement.
With something so critical to a comfortable retirement, why do so many business owners overlook the fact that if someone is going to buy their company, a lender will provide 80-90% of the acquisition cost?
Thinking that someone will walk in and pay you cash can be the costliest mistake you can make when it comes time to sell.
The truth is, even if your buyer has the cash, this is not the typical way businesses are acquired.?
If I have 5 million cash to invest, why would I buy a 5-million-dollar business when I could use leverage and buy a 25-million-dollar business with a lot more cash flow?
Leverage is the way of the world.
When it’s time to sell, these are your options:
- The buyer pays cash (happens less than 1% of the time)
- A lender gives the buyer a loan
- You’re the lender because banks won’t lend
- You keep working and stay in business
- You close the doors
- A mix of some or all of these
??
A startling reality…
There are 10,000 baby boomers who retire every day, and 1/3 of them own businesses. 91% of those businesses (10 out of 11) will close their doors, not because they're not great businesses but because no lender will give a buyer a loan.
And if you think it's the buyer's fault they can't get financing, you'll be one of the 10.
If you're getting ready to retire soon, your job is to make sure your business looks appealing to lenders. That’s it.
So, what can you do so you don’t have to close the doors? How can you be sure you'll be able to retire comfortably?
If you want to sell now, the way your business looks in the eyes of a banker will have the biggest impact on the price and terms.
You may be asking yourself, what do lenders want to see?
More importantly, what would prevent them from giving someone else a loan to buy your business?
I’m going to expose where lenders focus.
Get it right, and they'll open their checkbook and loan against extreme multiples to qualified buyers. And when you do get it right, you’ll have buyers bidding up the price because your business does what others don’t: please the lender.
Here’s a question I ask sellers when I’m considering buying their business. If you go on vacation for 45 days, what would your business look like when you return? Would you have more money or less? Would you even have a company to come home to?
Most tell me they can’t go for more than two weeks because if they did, they'd return to a complete disaster, which would take months to recover.
Look, if you work 30-50 hours a week, you don’t own the business; you are the business.
If you make a lot of money, it’s because you’ve become very good at selling your stuff at a high enough price to support your lifestyle.
You have a Lifestyle Business.
You’ve mastered ways to generate the income you need to be comfortable, yet you haven't mastered getting others to do it better than you. That’s what great companies do.
Look, lenders get commission when they lend money, so I can assure you that it's not their fault when they can’t approve a buyer.
Lenders hate lifestyle businesses because they’re not financeable, and over 80% of small businesses are lifestyle businesses.
Ultimately, a bank is looking to lend on a business that runs well without you because once they cut the check and you sail off into the sunset, they want assurance with a high probability that they’ll get their money back with interest. The business must be capable of repaying the loan because if it can't, it's not an asset to the buyer; it’s a liability.
So, if you want millions for your company, the value will be a multiple of your EBITDA, which is your earnings (net profit) before interest, taxes, depreciation, and amortization (principal reduction on loans).
If your EBITDA is under 3 million, a lender is typically going to agree to a valuation between 2 and 4 times your EBITDA, provided you are not a lifestyle business. Just like with real estate, pricing is driven by investors and lenders who understand proper valuation methods. Businesses are valued by multiples of earnings because earnings are what repay the investors and lenders.
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If your business can’t pay for itself, allowing the lender and the new owner to make a profit, you will not sell your business unless you are willing to be the lender, or you’ll have to do what’s necessary to get your business lender ready. Which usually means keeping some or all of your equity in the business for a few years and converting the business from a lifestyle business to a financeable entity.?
So, what should you do if you own a lifestyle business?
If you're thinking of selling in the next few years, you should probably have an outsider have a look under the hood to reveal what your business is worth today and, if that's not enough for you to retire comfortably, help you to create a plan that allows you to retire on your terms. Just be sure whoever guides you has substantial business experience.
If you’d like to have a confidential conversation about selling your company, feel free to contact me. My contact info is below.
What most people do is put this off because "I'm too busy to worry about this now."
If you put this off, your business may not be ready for you to retire when you are.
Don’t do this alone. When you’ve owned a company for 10 years or more, there's a very strong chance you have all the tools and training to do this on your own, but you won’t.
Here’s why.
It’s not that you can’t convert your business on your own; it's that you won't.
Lifestyle businesses pay really well and old habits are extremely hard to break. I’m as guilty as anyone when it came to owning a lifestyle business. The cars, first class travel, toys, and tax benefits, I get it.
If you want to retire soon, it's not about you; it's about the business.
I'm not a business broker. I buy companies and provide advisory services to business owners who are getting close to exiting their businesses. If you own a lifestyle business, a business broker could be the costliest mistake you can make. It could cost you years that you might not have and money you may never get back.
I'm not against business brokers. They can be a valuable asset, but not for lifestyle businesses.
Here's how most brokers attempt to sell a lifestyle business. They charge a substantial fee to create a confidential information memorandum (CIM). What's a CIM, you ask?
Basically, a CIM is…
- What you do
- How you do it
- How you got started
- What makes you unique
- Who buys your stuff
- Where does the stuff come from
- Who runs the business
- How many people work there
- How much money you make
- How much you believe it’s worth
Most importantly, how much profit a buyer can expect in the future because future earnings are the main reason someone buys a company.
The prettier the CIM is, the more you'll pay upfront.
Once the CIM is built, your broker will “exclusively†list the business for sale at a price close to what YOU think it's worth, hoping that they can make a huge commission in 3-6 months.
But they can’t just throw any price in the CIM; they have to justify it. And they justify the high sale price through flawed math using "add-backs," which are money and benefits you take from the business, and impossibly high EBITDA multiples for lifestyle businesses. All while ignoring the fact that without you, there's a high likelihood your business will fail regardless of how successful it is with you at the helm.
The sad truth…
List your lifestyle business with a broker, and offers come in substantially lower than expected because the valuation in the CIM is higher than lenders are willing to lend. After a year or two and no reasonable offers, you lose hope and keep working or close the doors. Either way, you've already checked out mentally.
But it doesn’t have to be doom and gloom. With the proper guidance, you can convert your lifestyle business into an investor-attracting magnet.
Put your focus in the right areas, and work on your business, not in it.
Seriously, you can retire in 6 to 18 months.
If you're approaching retirement and are thinking about selling your company, book a confidential call today. I’ll give you an honest assessment and a great offer if I like what I see.
A comfortable retirement might be closer than you think.
About the Author: David Mulvaney moved to Florida from Wisconsin in 1987. He worked as a locksmith’s apprentice until 1992 when he acquired a locksmith company primarily focused on auto and residential services. By 1994, Dave converted the company to 75% commercial services and sold the company in 1998 for over 10 times the acquisition cost. Since then, Dave has owned or owns controlling interest in businesses in the following sectors: manufacturing, engineering, global distribution, home services, commercial services, e-commerce, SAAS, residential, and commercial real estate. His companies have grossed over 250 million in sales over the past 33 years.
Dave buys and builds great companies and advises entrepreneurs on how to exit profitably on their terms.