I was in a meeting with a business owner the other day and he had a very specific life objective as to when he was ready to exit his business. He said that he believes that the first third of your life is for learning, the second third of your life is for working, and the final third of your life is for relaxing. His philosophy worked for him, and he knows when he needs to get started. Many owners don’t have that specific philosophy about their exit from the business – there is uncertainty about when to exit. So how do you know when “the right time” is?
First, there is no single simple answer such as “At 50, I’m going to quit my job and retire.” Exiting a business that you and in many instances your family have created has many components to consider. As an experienced M&A advisor, I recommend that all business owners thinking about selling their businesses seriously consider 3 key areas:
Your Personal Situation. Take a hard honest look at your family finances and your emotional state. These two factors COULD possibly be the largest hurdles when seeking a transaction. Ask yourself – am I really ready to make a plan to walk away? Can I afford to stop getting the perks of ownership?
A big consideration is, what is your life going to look like after selling? What am I going to do with my time? You have spent many years with your sweat equity building this company. The business could very well be a large part of your identity – selling means POSSIBLY losing that. You should mentally be prepared for that. I would recommend the business owner talk to their significant other, family members, or confidant because this is a self-evaluation that could use a support person. I had one business owner say, “You know the last thing I want to do is just walk around the mall every day.” But others say ”I want to travel, and I want to do all these things. We want to be free from owning this business.” As a business owner that’s a really good indication that you may be ready. Other things and aspirations have come into focus. I think that’s critical for you to self-discover and figure out your personal answer to that.
In addition to being emotionally prepared, you need to make sure that you have a lifestyle number in mind. You need to know what you need to get for your sweat equity investment to sustain your lifestyle in a manner you are comfortable with. Many owners might think, “Well, I’m working for the company, and I own the company, and I get a lot of perks and my autos are paid, and so on.” There are a lot of things that our business owner may not have after a sale and getting answers could help remove that uncertainty of, “Can I survive? Can I live comfortably?”
Working in cooperation with a financial advisor and Merger and Acquisitions advisor can help ensure that your lifestyle number is accurate, and your business value can get you there.
2) Your Business. How has your business been performing? Are you trying to recover from a couple of bad years of covid impact for example? Or are you doing OK and is the business performance going well? It doesn’t have to grow tremendously every year, but what’s the state of the business both financially and operationally? Can the company continue to perform even if you, the owner, are not working in it every day? That is a true litmus test for business readiness.
Even if an owner is mentally ready to sell, that doesn’t necessarily mean the business is ready to sell. I think you need to do some digging there, do some assessments. Touchstone does that through their program called “Exit Advantage,” where we will conduct business unit functional assessments in an attempt to identify if there are any problems internally with the operation, not only financially but management, operations, employees, HR, and many other areas. Because if there’s a chance to improve those, and you have the luxury of time, it’s important in attempting to maximize value if you take care of some of those issues. Touchstone can assist with the certainty of whether your business is optimized for a sale.
3) The Market. Once you have determined that you are ready personally, and your business is also ready, the next consideration is the market. Are buyers buying in your industry, are transactions occurring? Are the multiples reasonable? Do potential buyers, both strategic and financial, have the necessary cash?
Knowing the market is especially important and it might sound intimidating, but Touchstone is here to help owners. We provide expertise on the current market. We have conversations with buyers – both strategic and financial – typically daily. We are in constant communication with nearly all the top private equity firms and they give us insights as to where they are in their purchasing and closings, how selective they are and what type of industries are hot or not. A lot of that is good insight for a business owner, but keep in mind if you have a good business and it’s profitable, there’s very likely a buyer for that.
So, if you consider those three key areas and they all align, then it’s probably a good time to start the process of selling your business – but that may not completely calm your fears and uncertainty – so that’s why working with a qualified M&A firm such as Touchstone can once again provide guidance.
A seller wants some certainty in the process of selling their business. Touchstone advises the owner on questions such as, “What’s my business worth?” and “Is it worth enough for me to retire on?”
Answering all these questions, before you get started is often critical to get across the finish line and close the deal. One of the worst things that could happen is suddenly, a month or a week before the closing, you realize, “I’m really not ready for this.” A lot of the soul searching has to happen in advance and I think that is part of a good M&A’s process – that’s our process – talking to an owner to discover through probing questions if they ready.
We at Touchstone are here to ensure your certainty through every step of the process.