Selling a business is a massive moment in time for any good entrepreneur. The process can be complex, emotional, and stressful, but with the right approach, you can navigate it successfully and close better, bigger deals than your competitors.
Josh has been in business for himself since 2004, twenty years as an entrepreneur. In the last ten years, he’s built, bought, and sold 5 different companies for tens of millions of dollars, both online and offline.
Looking back, here are the best do’s and don’ts when selling your business:
Do’s:
Define Your Terms Upfront: Clearly articulate what you want from the sale, not just what the buyer offers. You do this with yourself, advisors, people who have done a similar-sized deal before, your CPA, all of them. Notice that I didn’t mention your friends, family, or parents. They don’t always have the best point of view of you for these kinds of things. Don’t feel bad. It’s more common than you think right now. You talk to everyone who can give you insight into what you want out of this deal and where it take your life and situation.
For example, something I found to be so impactful to my perspective and lifestyle was answering these ten questions to define my terms to myself and then to potential buyers:
1. How much annual income did the business give you in the last 12 months?
2. How much were your annual expenses over the last 12 months?
3. What are the multiples of EBITDA (earnings, before, interest, taxes, depreciation, amortization) 3-5 similar businesses have sold in the last 12 months?
4. What are your state/country’s tax rates? (Including capital gains tax rate)
5. How much do you need to start your next venture?
6. Take Answer 1 x Answer 3 = Dollar Valuation
For example: $4.3m EBITDA x 6 multiple = $25,800,000 retail business value
7. Take Answer 6 – Answer 4 = Actual take-home dollar amount (cash/stock, etc)
8. Take Answer 7 ÷ Answer 1 = Years Of Your Life You Get Back vs Current run rate income. Make $1m a year, a $4m dollar deal, after taxes, $2.8m take home, which gives you 2.8 years of your life back instead of keeping the business.
9. Answer 7 ÷ Answer 2 = Years of life you’re getting back spending the way you spend.
10. Do you like those numbers enough to sell your company?
Set up QuickBooks online on day 1: Ensure your financial records are accurate and complete from day one to support your valuation and demands. The better you track every single expense and dollar made from day 1, the easier it will be to sell your company and tell the story of the accounting. File for an LLC personally, open a bank account with that info, fund it with a few dollars, get a credit card, and hook it all up to QuickBooks online. Then begin working.
Showcase Your Success: Present your achievements and explain where and how you came to your valuation and why it is justified. Give multiple reasons and documentation to support the EBITDA, reps and warranties, and your payment terms. You can’t argue much with proof, proper documentation, and reporting.
Research Industry Multiples: Understand your industry’s typical business valuation multiples to set realistic expectations. What have companies sold for over the last 12-24 months in your industry?
Know Your Buyer: Research potential buyers, their acquisition history, and how your business fits into their portfolio to tailor your pitch effectively. Also, do as much research as possible into what they bought companies for vs. what the buyers’ company is valued at. For example, if a public company trades at 24x EBITDA, you sell for 6x EBITDA. The public company is making a great acquisition margin by still getting a delta of 18x multiple when that new revenue hits books. Private equity makes it harder to find these numbers, but you can ask these questions and ask other experts to value certain situations. Won’t know if you don’t ask. Be the person who asks too many questions rather than the person who asks not enough.
Interview and Hire The Right Team: You’ll need a broker or investment banker to seek out potential buyers. You want to negotiate the lowest possible rate for them to sell your business. 4-6% is average. I’d love to see 4% on most deals; that’s fair. The larger the deal, the smaller the percentage will be typically. You want to make sure they have the right network of buyers. You’ll also want to find a great M&A lawyer specializing in your industry. That will save you time, money, and headaches explaining and getting things done. I was able to close a deal for tens of millions of dollars in less than 60 days because of my legal team.
Don’ts:
Don’t Make Yourself Indispensable: If the business relies too heavily on you, it’s less attractive to buyers. Aim to make the company operate independently. Oftentimes you will see a buyer wanting you to sign an employment agreement for 1-4 years after the sale. Go back to “Defining Your Terms Upfront” to determine whether working for the new buyer is best for you.
Avoid Back-End Deals: Most deals realize their value upfront. Most mergers or acquisitions fail to realize their full value later on. Sometimes stocks drop, executives leave, egos get in the way, season shifts, and anything can happen. Be wary of agreements promising significant future payouts, as they have been known to underdeliver.
Think Carefully About Partial Sales: Selling a portion of the business requires careful consideration. Ensure you’re comfortable with your future role, your level of involvement, and the dollar amount you’ll receive upfront to do so. This also means you’ll have to make a second deal with the buyer or maybe even find a new buyer for the rest of your business equity. This is not fun. Selling something like this twice over isn’t easy and can be emotionally draining to navigate if you and the buyer/partners do not have a good-standing relationship. I feel selling 100% of your business is, most of the time, the best way to go if you’re selling any part of it at all.
Lifestyle matters. What is yours? What do you want it to be? Define what that means, have a team meeting, and talk with your spouse. Take Answer 2 from above, are you going to stay there or are you going to double or triple that number? Plan, prepare, and be cautious so you don’t lose all your hard-earned money. Build your deal to fit this model for yourself and value the deal based on this.
Main question: How many years does this deal give you back based on the lifestyle you want to live? Is it worth it? You can always build and sell another business now that you know what you’re doing. This isn’t the end forever. Just the end for that particular business and you. Just build another one.
Written in partnership with Tom White.
