Earlier this year, I was talking to a 68-year-old guy interested in selling a business he’s owned most of his adult life so he could retire. This scenario comes up quite frequently as there are two-thirds of all businesses in the U.S. are owned by people 67 years of age or older.
Now I’m still in negotiations with him, so I’m not going to name the product or service he manufactures (instead I’ll use ‘custom widget’), but he’s facing a situation very similar to many other boomers looking to sell a business…
And the lesson here is very important & worth sharing.
His Story / Background
The seller is a manufacturer and creates custom ‘widgets’ designed to meet the specific needs of his customer. Most of his larger competitors have 2-3 molds of this product and are able to mass produce quickly & efficiently. This seller’s competitive advantage is to listen to customers and custom create the product to their liking.
He’s his main employee, though he does have two other employees who help him out with miscellaneous tasks for running the business.
He doesn’t spend any money on advertising as he’s built his business on his reputation and getting referrals from his satisfied customers.
Now he’s ready to retire and wants to cash out. As he’s telling me this story, I can tell he’s visualizing himself as a marathon runner victoriously approaching the finish line with his hands raised and the crowd cheering as he approaches.
This structure is great for running a small business that you will continue to run until you close the doors.
Unfortunately, he couldn’t have told a story that would make your typical buyer want to buy his business less!
Do You See The Problem?
What the seller basically told me is that he’s the star employee of the business who is solely responsible for all client acquisitions and income producing activities.
Now, he wants me to pay him so his star employee can retire and leave me with a business that has overhead but no steady flow of revenue and no means of operations.
Yikes! Does this sound like a great way to position your company for sale?
Unfortunately, many boomers looking to sell their business so they can retire make this big mistake: they fail to look at their company from the perspective of the buyer.
This mistake is understandable – as a business owner, you’ve put your blood, sweat, and tears into creating, building, and running this business. You’ve missed birthday parties, dance recitals, and countless other life events that certainly created stress at home. Now, as your near retirement, you deserve to be paid and give your spouse the relaxing lifestyle they deserve.
But the reality is, from the perspective of the buyer, none of that matters.
Imagine you’re buying a house from a couple who just had their last of 3 children graduate from high school and now they’re ready to downsize. They can tell you how valuable the house is because of all the memories, the Holiday Dinners & birthday parties and other major life events. But will those memories of the seller impact what you’re going to pay? Of course not – you’re going to pay market value.
It works the same when selling a business. Your sweat equity doesn’t matter. If you try to factor your past efforts into your pricing, you will be asking too much and not be able to sell.
A business buyer is looking to buy an existing revenue stream that will continue to grow without you as the key influencer. If you’re able to prove this to the buyer, you’ll probably get closer to the number you’re asking for.
Ways To Avoid This Mistake
When looking to sell your business, don’t make yourself out to be the Super Hero! Saying that “you’re the brains behind the operation & the biggest reason why the business has had the success it has” may be a good boost for your ego, but to a business buyer, that phrase screams “run”!
From the first moment you begin daydreaming about selling your business, instead of setting expectations for getting a huge financial reward at the end, try a different approach: position your business for long-term success without you.
If you take the mindset of focusing on creating a legacy for yourself rather than a quick transaction, you’ll be able to create a much more valuable company that will yield you a much better financial payout.
Things To Consider When Creating A Legacy
The key to not being the Super Hero of your business is to create a good infrastructure and hire good people to operate it. In the story above, if this guy had even 1 or 2 other employees who could duplicate his ability to create his customer widget, the business would be significantly more valuable. If he had existing processes in place for bringing in new clients that didn’t involve or revolve around him, the opportunity would be much more attractive. Creating and implementing systems & process designed for long-term growth make your business much more attractive to potential buyers.
Another key is to be flexible with your terms. You may have a number in mind that you want to receive when you sell and go into retirement. However, that amount doesn’t have to be received all at once. If you’re open to taking distributions over time, you may actually even be able to get more money in the long-run. From the buyer’s perspective, the more money he or she has to invest up front, the riskier the deal looks. With greater risk comes a lower offer price.
In summary, failing to look at your business from the perspective of the business buyer will crater your retirement plans. While businesses who make this mistake are still able to complete a sale, they leave significant value (in many cases, owners sell for 15 to 30 percent less than would have been possible ) on the table by not taking the time in advance to ready the operation for a deal.