When Is The Right Time To Exit a Business?

When Is The Right Time To Exit a Business?

June 03, 2021
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Fact: There are over 30 million privately-held businesses (the majority of which are sole-proprietors) in the United States according to a 2019 SBA study1

Fact: There are almost 60 million people employed by those small businesses (defined as 500 or less employees) in the United States.

Fact: 100% of business owners will exit their business, whether they plan to or not.

What I’ve come to find over the past decade is that the majority of business owners have at least one common thread, and I don’t mean the one where they are tenacious, won’t take “no” for an answer, are willing to work 100 hours a week; it’s the fact that almost every business owner I come across is in complete denial as to how or when they will exit their business.

You see, this mindset isn’t rare or unique to a certain sector or industry; it’s a commonly documented fact that most business owners have no formal plan or arrangement to transition their business to someone else. To further my point, a recent study from Wilmington Trust confirms my biggest fear: 58% of business owners have not completed a succession plan2.

At best, the owner has it in her or his head a general timeline, dollar amount and soon-to-be proud recipient of their business. While that’s all fine and dandy, how many acquirers want to buy a business that doesn’t have a blueprint for a founding owner’s exit, or management transition, or continuing a key customer relationship?

Sure, the business can still sell to someone else, but at what value?

Over a decade ago, I first started tracking this wave of business owners soon to sell their companies over a 20 year period and quickly stumbled upon the phrase “Great Wealth Transfer.” M&A powerhouses such as Z. Chris Mercer and those in high rise buildings at PwC and Deloitte estimated the enterprise value of businesses yet to sell ranged from 7-8 Trillion USD. Today, that value is estimated to be well over 10 Trillion USD3. The reality is only 20%-30% of businesses that go to market end up selling. Most businesses are not prepared to transition, nor are they attractive to the prospective buyer at the perceived “best-in-class” asking price. You see, there are certain steps an owner can take leading up to the sale of a business, but most are unaware of what to do or simply ignore what it takes to position the company for sale. Everything from customer concentration issues to management transition strategies, there are numerous ways an owner can ensure the potential buyer feels confident about the acquisition. Check out my blog on the 8 key drivers of enterprise value and how you can garner a higher multiple on the sale of your business.

If you’re like a lot of entrepreneurs, you assume your industry and its size will determine the value of your company. While size matters, eight other factors impact the value of your company more than your industry. In fact, after analyzing more than 55,000 businesses, The Value Builder System™ has discovered getting these eight factors right can lead to acquisition offers that are more than twice the industry average. Likewise, we have seen examples of companies getting less than half the industry average multiple because of a weakness in one or more of these eight areas. To see how your company scores, you can complete the Value Builder questionnaire and get a report on how you’re doing in each area.

  1. https://cdn.advocacy.sba.gov/wp-content/uploads/2019/04/23142719/2019-Small-Business-Profiles-US.pdf
  2. https://library.wilmingtontrust.com/z-featureditems/featured-1/2q-2021-business-owners-outlook-the-rush-to-retire
  3. https://www.forbes.com/sites/sageworks/2017/02/05/these-8-stats-show-why-many-business-owners-cant-sell-when-they-want-to/?sh=39b3cb8244bd