John Dini has a message for you, and it might surprise you – selling your business could be a lot harder than you think.
For starters, the supply of small businesses up for sale is going to far outstrip the number of people who are willing and able to buy them.
Even more importantly, even if you do find a buyer, getting the deal done at a price you like is going to be a challenge.
In order to understand how we got here, we have to travel back in time to World War II.
The Baby Boom – The Unstoppable Force
Peter Drucker once said, “I don’t predict the future. I look at what has happened already and point out the inevitable result.”
So here’s what happened.
In 1945, soldiers returning from World War II started to have a lot of babies…a lot of babies. Enough of them that the U.S. economy experienced 40 years of sustained growth as a result of the influx of new workers and consumers.
But this generation wasn’t different just because of their sheer numbers. This was the first generation that didn’t grow up to be a carbon copy of their parents.
They were the first generation to grow up with television, and because of it, the first generation to be explicitly marketed to over their entire lifecycle.
They were also raised differently than previous generations, in no small part because of a book published in 1946 by Dr. Benjamin Spock – The Common Sense Book of Baby and Child Care. It was outsold by only one book during the entire 20th century – The Bible.
That book argued that parents should design their schedule around their children and their emotional needs, rather than the strict and closely controlled techniques used by previous generations.
Essentially, Boomers became the first generation where the family life revolved around them instead of their parents. They were also the first generation to believe that they could be anything they wanted to be when they grew up.
One of the things Boomers wanted badly was upward mobility. Because of the way they were brought up, they believed it to be their birthright. What they did for a living and the material possessions they collected along the way became a strong part of their identity.
As these Boomers reached their 30s, they started to view entrepreneurship as the only avenue for upward mobility. There just weren’t enough high-flying corporate jobs to go around.
Boomers create a small business boom
In order to secure their upwardly mobile lifestyle, Boomers turned to entrepreneurship. In fact, they formed businesses at a rate never seen before, or since.
Between the years of 1976 and 1986, the then 30-something Boomers stepped up and almost doubled the amount of new business formations – from an annual average of 300,000 previously to an average of over 500,000.
To put it in perspective, even though the U.S. population grew from 190 million in the mid-80s to 320 million today, the number of business startups has remained flat since the one-time Boomer surge.
Two things made it possible for those entrepreneurs to succeed as a group – the outsourcing of family life and franchising.
[emaillocker]Family life had to be outsourced because entrepreneurs needed to work longer hours – manytimes stretching into the evenings and weekends – in order to help pay for their upwardly mobile lifestyle. In many cases, both parents adopted that grueling schedule.
That required many common chores to be outsourced to third parties. Meals, housecleaning, home repair, gardening and auto maintenance were all contracted out. The Boomers thought that if they could get somebody else to take care of the mundane tasks of daily life, they could truly have it all.
That led to the rise of franchising. In return for a little cash up front and the willingness to work hard for long hours, these Boomers were promised a viable business. What types of businesses were being franchised? The ones that would do the work that Boomers wanted to outsource.
In hindsight, the formula was simple. Start with a generation that is 50% larger than the previous one. Put 30% more of that group (women) into the workforce. Have most of the wealth generators extend their average week by another 20%.
What do you get? An economy that triples between 1975 and 2005.
That rising tide is fine, until those Boomers realize that the only way they are going to retire comfortably is to sell their business. And that the people they need to sell them to – Generation X – isn’t buying what they are selling.
Gen X isn’t buying what the Boomers are selling
The most likely purchaser of a Boomer’s owner-operated business is somebody from Generation X. There are two things to address before we move on with what that means.
First, there are different sets of buyers for mid-market and large companies, depending on the size and profitability of your company.
Second, Millennials are not good targets for business purchases today. The Great Recession and the debt Millennials accumulated in the past decade mean that they won’t be a major factor in the acquisition market for at least another 10 years. That will be too late for many of the exiting Boomers.
So, if you want to sell your business, step #1 is to understand who you are selling to. And Gen Xers couldn’t be more different from Boomers.
For starters, they place greater emphasis on work/life balance. Their work is something they do so that they can enjoy their life. For Boomers, their life and their work are often indistinguishable.
They also have different life objectives. Personal happiness is their priority, not an upwardly mobile lifestyle. This means that hard work – a requirement in most owner/operated businesses – is in direct conflict with what they value most.
And if they don’t have what they want, instead of working harder or longer, they turn to easy credit. So, living paycheck to paycheck has become the norm. What does this mean for Boomers selling their business? In many cases, they mayhave to become the lender of last resort in order to get a deal done.
Then you’ve got the obvious demographic factors – there are simply more Boomer sellers than there are Gen X buyers.
In addition, there’s the gig economy which, purpose built for a generation that values their independence, allows people to cobble together a living without the risks and headaches of owning a business.
Everything we’ve focused on in the summary so far has led us to the following conclusion: selling your business could be a lot harder than you think.
Fortunately, there is a way to greatly increase your chances of transferring a business for the price you want, to the buyer you want, and in the time frame you choose. It’s called Exit Planning.
Exit planning – winning starts with a plan
Now, let’s move on to some good news.
The good news is that most of the Boomer generation is woefully unprepared to sell their business. That means that the ones that are well prepared will be much more likely to find a buyer, and to get a good price.
Let’s start out by defining what Exit Planning really is. Here’s the definition that Dini gives us:
Exit Planning is the process of developing a business owner’s strategy for what may be the biggest financial transaction of his or her life…the transfer of the business.
That strategy may be a succession to the next generation of family. It could be a sale to employees. It may be a sale to another entrepreneur, competitor or acquisition by a larger company. In some cases, it might require an orderly dissolution.
In every case, it involves tax, legal, financial, operational and risk management expertise. No one practitioner has all the knowledge required for every aspect of the plan. Exit Planning, in the true sense of the word, is coordinating all those skills so that they work together for a single objective.
When Boomers were the principle buyers, you could contact a business broker and get your business sold fairly quickly and simply. But for all of the reasons we’ve already reviewed, those days are long gone.
These days, selling a business is sort of like building a custom home. You’ll need to hire a general contractor to manage and coordinate all the trades so that the house gets built on-time and on-budget.
In a business sale, an Exit Planner is your general contractor, and the trades include people like an estate attorney, accountant, business attorney, financial planner, business valuator, and business growth expert.
Yes, this really is the good news. The more complicated, time consuming and difficult the process is, the less people will actually do it. And when you do, you’ll be well positioned to sail off into the sunset – preferably on your brand new yacht.
Getting your business sold
Here is what you need to do in order to maximize the sale of your business.
The first thing you need to do – right now if you haven’t already – is sit down and triangulate three points.
The first point is where you are today in terms of your net worth. This is pretty straight forward and should include your stock portfolio, income property and other assets. Don’t include your business in this step.
The second point is to determine when you want to retire.
The third point is the retirement amount you’ll need in order to fund your lifestyle for the remainder of your life on this beautiful planet.
This will act as a reality check, because while most entrepreneurs have a number in the back of their mind of what they would sell their business for, they often don’t have a concrete plan to get there.
The next step is to get your business valued today. If you don’t, you’ll have no idea what amount is necessaryto fund your retirement. There are a number of ways to value your business, and you most likely don’t have a great grip on which one is most applicable to your situation.
Understanding this now is critical. The last thing you want is to go sell your business, only to find out that you overvalued it by 2x, which means you won’t be able to retire. That’s a mistake that many owners will make, but not those who approach it with solid information..
Now you’ll know exactly what your shortfall is, and the metrics you’ll need t in order to meet it.
If your business doesn’t currently meet your objectives, you may need to grow it. According to Dini, the best way to grow your business is to retain a growth expert in order to get there. Work with them to systematically grow your business to meet the targets you identified in the previous step.
Once you’ve hit your growth goals, it’s time to identify a buyer. You could sell to somebody in your industry, a professional investor, a strategic buyer, or even sell the company to your employees. There are pros and cons to each, and you should explore each option as part of your due diligence.
Pulling The Trigger
There are a lot of things you need to consider as you actually complete the sale. How will you transition yourself out of the business? Are there any post-closing issues you’ll need to deal with? What confidentiality clauses do you need to be aware of? How do you let your employees, vendors, customer and lenders know about the sale?
Selling your business can be a challenging process. But you can make it easier if you start now.
It will likely be the largest financial transaction you ever undertake, and there are many, many considerations that we aren’t able to cover in this brief summary.
If you are serious about eventually selling your business, there are two things you should do next.
First, go and buy a copy of this book. Second, seriously start to think about who you want on your Exit Planning team. It just might mean the difference between retiring in comfort and having to find a new job.