Why 81% of Business Owners Don't Invest More Time Preparing For the Sale of Their Business

Recent research from UBS revealed that a whopping 81% of business owners who sold their business regretted not spending more time preparing for the sale. 73% of respondents said they spent less than two years.

Why would a business owner not prepare in advance for the most important and potentially life-changing transaction of their life? Here are several reasons:

“I’m too busy growing the company!”

In The Seven Habits Of Highly Effective People, Stephen Covey talks about climbing the ladder only to find out that it is leaning against the wrong wall. Growing Sales and EBITDA is important. However, it’s not just the quantity of the revenue and profit, it is also the quality of the revenue. Roughly 20% of business value is based on the numbers. The other 80% of business value is based on intangible capital. Intangible capital drives your multiple.?

If the range of multiples in your industry is 4X - 8X, where would your business fall on that line? The answer is that it depends on the quality of your business. Consider three possible examples:?

1. Business A focused on growth without understanding what drives the multiple and got a 4X multiple on their $2M EBITDA for a valuation of $8M.
2. Business B focused on growth and the intangibles and got 8X on $2M EBITDA for a valuation of $32M
3. Business C focused on growth but neglected the intangibles and got 0X because no buyer was willing to take the risk. (Keep in mind, only 17% of businesses that start a sales process actually finish it.)

If you as a business owner are too busy growing your business there is a good chance that you are too wrapped up in daily operations. Owner dependence creates a massive drain on the value of a business because the buyer is afraid things will fall apart if you were gone. The best way you can be busy as an owner is to be busy preparing your business to sell. In doing so you’ll begin assigning portions of your role to people and their teams. As you do this, you’ll not only increase the value of your business, you’ll also raise your level of freedom.

“A company that is ready to sell is ready to grow.”

In Walking to Destiny , Chris Snider says, “A company that is ready to sell is ready to grow.” Recognize that exit planning is really just great strategic planning. Continue go grow, but make sure to grow the intangible capital parts of the business: customer capital, human capital, cultural capital, and structural capital.

“I’m going to transition the business to my kids.”

Wonderful! The bad news is that about 70% of international business transfers don’t go well. These situations are tragic, damaging the business and hurting family relationships. One of the main reasons is that the business was not prepared to transition.?

The kindest and smartest thing you can do to transition a business to your children is to ensure that the business is operating at peak performance.

A business that is ready to sell has a higher likelihood of being successful after the transition. As an added bonus, if the family transition doesn’t seem like a good option, the business will be ready to command maximum value to an external seller.

“I am too young. I’ve got time.”

The older I get, the faster a decade passes by. If you’ve celebrated your 50th birthday and haven’t started planning for your exit, you need to start immediately. If you are under 50, you are not off the hook. An unsolicited offer may wake you up to the recognition that this is a favorable time to sell. If your business is ready, you can take advantage of it. If not, opportunity may pass you by.

“I didn’t see it coming.”

Life happens. Nobody expects the big D’s: Death, Divorce, Disability, or Disagreement with Partners. Sadly, these forced exits often go poorly. Instead of selling at a multiple, many of these businesses get liquidated. Without proper estate planning, many get destroyed in probate. The ones that survive often limp along. Many end up failing in the years to come.?

Chances are you have life insurance to ensure your family is taken care of if you meet an untimely demise. That’s great, but what about your business? Is it set up to continue after your death? Or will it become a massive burden to your family during their time of grief? Wise business owners recognize that properly preparing their business for an exit is the kindest thing they could do for their family.?

How Much Time Should You Spend Preparing?

Ideally, a business owner would start the process of exit planning 5-7 years before an exit. With 75% of business owners wanting to exit their business in the next 10 years that means virtually every business owner should have an exit plan in place. Sadly, only 31% of respondents to the 2023 National State of Owner Readiness Report stated they had spent some to little attention on their exit from their company.

31% of respondents to the 2023 National State of Owner Readiness Report stated they had spent some to little attention on their exit from their company.

To create an ext plan you need three things:

1. Business Valuation: You need to know what your business is worth. You also need to understand the best-in-class valuation for a business in your industry so know what is possible. This market valuation you use at the beginning of the value creation process is simpler and faster than the full CPA valuation you’ll use later on in the process. We use software that benchmarks a business against a database of current industry multiples.
2. Personal Plan: Next you need a Personal Plan. This includes a vision for what you would like to do after you sell the business. It also includes a personal financial plan. You need to understand your wealth gap (the difference between your personal net worth and what you would need to be financially independent) so you can know the minimum amount you want to sell the business for. Partner with a financial advisor that is a CEPA (Certified Exit Planning Advisor).
3. Value Creation Plan: If there is a (large) gap between what your business is worth and your personal wealth goal, don’t panic. This is common. It simply means you need to get intentional about driving value growth. A Value Creation Plan aligns your personal goals with your business goals, creating an actionable plan to accelerate value so you can fill your wealth gap and prepare to enjoy a new level of freedom.?

Are you ready? If not, reach out today and let’s get started. We can partner with you and your financial advisor to value the business. Then, together we can create your personal plan and Value Creation Plan.