Cleaning-industry business owners have invested blood, sweat, and tears into building their companies, and most have created a detailed plan of what they hope to accomplish while owning a company. But all good things must come to an end. At some point, it’s time for the next chapter of your life to begin. Have you thought about your exit plan?
In order to maximize value in a sale, it is important to understand and apply what I call the “Five Ks” of selling your business.
1. Know what your business is worth. Typically, the largest asset a business owner has is his business. Owners often ask me, “How much is my business worth and at what multiple should I sell it?” There is no simple formula or quick answer; each business is unique and back-of-the-envelope math is rarely accurate. The only way to know what yours is worth is to invest the resources in a comprehensive business valuation that will analyze your business internally and compare it to similar businesses that have been sold recently.
2. Know what motivates buyers. There are three primary types of buyers: large companies, private equity groups, and private individuals. Each has its own strategic objectives and unique perceptions of value. It is extremely important to know how to present your business in a way that will align with a purchaser’s motivations. Understanding the buyer’s perspectives can help you negotiate a better deal.
3. Know when to sell. When a professional athlete is in a contract year, that athlete typically ends up having a career-best season. Often, he becomes a free agent and finds a team willing to overpay on his next contract. Using the same analogy, if your business is thriving, that is the time to sell in order to maximize its value. Consider these three factors when selling your business: personal timing, company timing, and market timing. The natural tendency is to base your decision on personal timing. For example, a personal-timing-based decision occurs when you want to retire or when you are forced to sell for reasons such as illness or divorce. I cannot stress this enough: personal timing is the least important factor when determining the best time to sell. Buyers do not care that you want to retire, but they do care if your business is growing. Likewise, the market won’t be hot just because you want to sell, but you can choose to sell when the timing is right.
4. Know the difference between price and terms. Every business owner wants to sell his company for maximum value. Unfortunately, too many owners focus on the price without giving proper consideration to the terms of the deal. This can lead to disappointing and even disastrous results. Consider two offers for the same business: one for US$1 million, paid all in cash at closing, and the second for $1.5 million, paid out over 10 years. Without understanding the terms, there appears to be a significant gap between the two. However, depending on how the $1.5 million deal is structured, the seller may not collect the full $1.5 million and may end up worse off than if he had accepted the cash offer. At the end of the day, there are several ways to structure a deal that works for both parties. The more flexible you are as a seller, the more likely you are to reach a positive outcome.
5. Know how to manage the deal. It is imperative to know and understand the steps in the deal process. Every deal is different, but on average, it takes roughly six to 12 months to sell a business. There are four keys to the deal process: preparation, marketing, deal structuring, and closing. Practice and preparation are the key ingredients to winning in sports and the same principles apply to a successful sale. If the preparation is done correctly, all other portions of the deal process will flow smoothly.
If you’re like most people, you’re counting on the sale of your business to fund your retirement. Considering the time and effort you’ve invested in developing your company, it can be difficult to remain objective—that is, not allowing emotion to factor in to your decisions—when transitioning to this new stage in your life. To that end, you may consider consulting with a third party who can provide an impartial viewpoint and assist you with maximizing your results.