Too often, a business owner opens their mind to a sale when they’re ready to retire. Too late! Business sales are often structured with a lump sum upfront and some sort of retention bonus or earnout on the tail end.
If you’re selling because you want or need to retire today, you’re likely to miss out on the full value of your baby.
Most businesses sell between four and seven times earnings. But I’ve seen some sell for a one times multiple and some sell for a 10 times multiple. Most leadership transitions are between six and 24 months.
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But I’ve seen some that were immediate, and in the wealth management business, I’ve seen some as long as five years. And I certainly haven’t seen it all.
Here, I highlight what’s typical and what could impact where you fall in that average range.
Type of business
Simple. Think e-commerce operations with straightforward business models or small businesses like your local chain of dry cleaners or car washes. Companies like this are more dependent on operational continuity than they are on the relationships of the founder. People may know you and like you, but if you sell, they’re happy if their car and clothes keep being returned clean.
Complex/regulated. Of course, businesses are not simple or complex. They fall somewhere on the spectrum. For the purposes of this column, I’ll highlight highly regulated businesses as well as technical businesses. Think pharma, biotech or financial businesses. In the case of the financial business, the retention of the end client is also key, which would be a reason to stretch out the transition.
Type of buyer
Strategic. Strategic buyers are already in your business or an adjacent business. They often have management teams and operational processes that can run the business day-to-day. For that reason, transitions tend to be shorter. That said, like the financial business example above, the more relationship-based the business, the longer the transition.
Financial/private equity. These firms are doing a few things: They are buying cash flow, finding efficiencies (sounds nicer than it is) and driving earnings to increase the multiple. They are often operating on four- to seven-year timelines and will keep the leadership team in place if it benefits the bottom line.
Employee stock ownership plans. ESOPs carry less financial motivation and more of a desire from the owner to leave a legacy or have the company live beyond them. Therefore, slower transitions are typical.
Are you ready (and able) to move on?
But the most important factor is likely to be the first one I mentioned: The desire of the business owner to exit. The faster you head for the door, typically, the more money you leave on the table. But you may not care.
We tend to think of money as a tool, and if you have enough tools in the shed to do the job (i.e. maintain your lifestyle), why would you keep working just to accumulate more?
I recently listened to an interview with the founder of Loom, who estimated he left about $60 million on the table by leaving during the earnout. Guess what: He already had plenty of tools and was ready to move on.
We rely on financial planning software to figure out that part. You can access a free version online.
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