I want to paint a picture for you to understand WHY every business should prioritize exit planning and why you should start working on it today.
Investor and entrepreneurial icon Carl Allen would say -
“The only reason to have a business is to sell it and get paid for it.”
I agree.
However, I want to be clear. You don’t need to sell your business right now, next year, or even in 5 years. Last week, I met an entrepreneur, and I shared the Carl Allen quote with her. She said, “Well, that’s not me at all! I’ve worked so hard to get here, and I don’t want to sell it.”
I understand.
Again, exiting the business and getting paid for it may be a ways off into the future for you. But if you start maximizing the value of your business and working on your exit strategy now, your business will be that more valuable when the time comes.
The sad fact is that 83% of all attempted business transitions fail to reach the finish line. That statistic means that a mere 17 percent exit successfully. Family business transitions, or intergenerational transfers, are not much different. Only 30 percent of those businesses successfully transition to the next generation.
There are countless reasons why business transitions fail. I could fill an entire season of podcasts with an exhaustive list of reasons. But let’s take a second to examine why those precious few in the 17 percent minority succeed.
17 Percenters Reasons for Success
Disruptive Businesses. These are businesses that command a high valuation by large suitors.
Lucky Businesses. Some businesses are just plain lucky - in the right business at the right time.
Beyond those two outlying reasons, most of them have one thing in common.
They are prepared.
What does “being prepared” mean?
Being prepared means that the business owner has defined an exit strategy and relentlessly executed it until the business owner has reached their goal - building long-term value. To accomplish this, most successful owners had great internal and external teams to help them exit the business at the highest value possible.
Building value and transitioning a business is a process that takes time. It’s a process very different from running a business on a day-to-day basis.
Let’s face it - no one can do what you do! You started or bought this business, and you grew it to where it is today. You’re simply the best at what you do. But, what do you know about exit planning? If you’re like most business owners - very little. But that’s OK. Get a copy of my book - Maximize Business Value Begin with the Exit in Mind - and listen to the next few episodes of this podcast - and you’ll have some of the information you need to start moving toward a successful exit.
Let’s talk about the numbers…
There are roughly twenty-eight million businesses in the United States. Of those, about six million have more than one employee, and the vast majority of those, 99.7 percent, have $100 million or less in annual revenue. With less than $100M in revenue, we call that group lower middle market and small business.
Each year, approximately 250 thousand of these companies with less than $100 million in revenue will come up for sale, putting themselves on the market and looking for a buyer. Of those companies looking for a buyer, only 42,500 will complete a transaction.
Digest that for a moment. Of all the businesses that come on the market, only 17 percent will succeed in closing a transaction—fewer than one in five. A whopping 83 percent of attempted transactions fail.
It sounds hard to believe. You work your butt off for fifteen, twenty-five, even fifty years to eventually sell your business so you can travel the world, retire to your favorite vacation spot, or volunteer more. And now you are ready to start that next chapter only to find out that you are not able to sell the business into which you’ve poured your very existence.
Or, you do get your life’s work sold, but the selling price falls way short of your expectations. No one ever talked about that nightmare when you started your business.
Although there is a seemingly endless supply of articles written on wildly successful exits, with small companies gobbled up by giant behemoths for billions of dollars, the fact remains that these are the smallest minority of business transactions.
You never hear about most of these kinds of sales. And certainly, most failed exit attempts never make it into the press. So, we are left to draw conclusions based on the minority of transactions that do see the light of day.
Why do some business owners successfully exit, and others don’t?
And, what can you do now to get into the elite 17 percent club of owners who successfully transition out of their business? There is precious little good material on how to exit your business successfully. Having participated in one hundred transactions myself, I understand why most business sales wind up in that 83 percent category. It boils down to a lack of knowledge leading to little or no preparation.
As I’ve already stated, most entrepreneurs know how to run their business and do it successfully. Many times, that success drives a sense of invincibility and pride. Let’s face it, that “I can do anything” attitude serves owners well as they build wildly successful businesses. When it’s time to sell, they believe they’ll knock it out of the park just like everything else, right?
Most entrepreneurs know tons about their business. No one on the planet likely knows more about your business than you do. Unfortunately, you likely know very little about exit planning unless you have been through a business transition before. And worse, there are darn few places to turn to get help or even know what to do next. So, when it’s time to sell, where do you turn?
When you want to sell your house, you call a real estate agent, right? They walk through the house, tell you what to do to make it more sellable, and then list it on the multiple listing service (MLS), a universal database where you can find out everything there is to know about all the houses on the market. In business, it’s a bit different.
There is no MLS for businesses for sale. The capabilities of business sales experts range widely. Although this podcast is not about sales agents, there are two general categories of professionals dedicated to selling businesses: business brokers and investment bankers. Business brokers typically work in the micro business category (less than $5 million in revenue), although some broker more significant deals. Investment bankers usually handle everything else. Most specialize in the middle market ($5 million to $1 billion depending on who you talk with). Most brokers and investment bankers have a particular industry on which they focus, although my experience has been that most will go anywhere.
So, you reach out to that acquaintance and tell them it’s time to sell your business. They jump into action, slap together a listing, and you’re off to the races. Not so fast.
By the time you’re ready to sell, it’s too late to be proactive in preparing your business for sale. And yes, you need to prepare for sale, a process that can take several years under the best circumstances.
Brokers and investment bankers make their money at closing. It’s a time-tested business model. They list your business either for free or for some reasonable retainer, and they make the bulk of their money when they help you successfully close a transaction. Therefore, it stands to reason that they need to close deals to make money, so deal flow becomes very important. Brokers and bankers are not all created equally, so it’s essential to find a good and reputable one when it’s time to sell.
Most exits fail because the owner does not start early enough to prepare the business for a successful exit. The simple answer is to start early and have a strategic plan. A concrete exit plan provides the guard rails as you drive your business toward your ultimate goals and dreams. Easier said than done.
Check back here for Part 2 next week - we review some of the things that can catch a business off guard and force an exit strategy when it’s not wanted.
__________________________________________________________________________
Tom Bronson is the founder and President of Mastery Partners, a company that helps business owners maximize business value, design exit strategy, and transition their business on their terms. Mastery utilizes proven techniques and strategies that dramatically improve business value that was developed during Tom’s career 100 business transactions as either a business buyer or seller. As a business owner himself, he has been in your situation a hundred times, and he knows what it takes to craft the right strategy. Bronson is passionate about helping business owners and has the experience to do it. Want to chat more or think Tom can help you? Reach out at tom@masterypartners.com or check out his book, Maximize Business Value, Begin with The Exit in Mind (2020).
Mastery Partners, where our mission is to equip business owners to Maximize Business Value so they can transition their business on their terms. Our mission was born from the lessons we’ve learned from over 100 business transactions, which fuels our desire to share our experiences and wisdom so you can succeed.