In episode 43 of the Retire Right Podcast, I brought in Albert Hakim, a certified merger and acquisitions advisor with Kensington Company. Albert covered what actions business owners can take to make their businesses more sellable and attractive to buyers.
Consider this: Your business is likely the largest illiquid asset you own. How will you turn it into a liquid asset that you can use for retirement planning?
Take these important steps to make your business more valuable and exit-ready:
1. Start early.
In a perfect world, you would start thinking about your exit strategy as soon as you start your business. That way, you can plan exit goals and work towards them throughout your career. However, the other answer, and perhaps more realistic option, is to plan your exit strategy 3-5 years before you’re ready to sell. It takes 3-5 years to create meaningful changes that allow you to show potential buyers that they are making the right decision in purchasing your business.
2. Stop wearing all the hats
It is very possible that if you’ve owned your business for a long time, you’ve become the expert in its day-to-day operations. You are the strongest CEO, strongest accountant, strongest manager, and the strongest employee you have. When you sell your business, will someone new be able to step into your role and execute what you were doing and how you were doing it?
By hiring someone to learn the ins and outs of your business, you can avoid taking all of your knowledge with you when you leave. Tap into your professional network and bring in your advisors early to help you determine the best steps to take to prepare your business for sale. Look into the idea of hiring someone hands-on, whether it’s a new CEO, strategist, or coach. Having someone hands-on who understands the inner workings will help increase the value of your business.
3. Avoid customer concentration
Throughout Albert’s career, he worked with a commercial cleaning company whose profit depended almost entirely on a single client. The client provided a great deal of revenue and helped to almost quadruple the valuation of the company over five years time. However, when it came time to sell, the customer concentration diminished the value exponentially.
A sensible buyer will not want to risk a loss should the relationship with the client dissolve.
To remedy this situation, a solution would be to look at acquiring another company that has many smaller clients of their own. In doing this, Albert’s client took their customer concentration from 85% to nearly 40%, increasing the value of the company and ultimately leading to a sale with a huge profit for the client.
4. Understand what business you are in and the future it holds
It’s important to understand the future of the business that you are in. Say you own a company that produces and prints Rolodex cards. As the world becomes increasingly reliant on technology, the reality is that no buyer will be looking to purchase a business that has a time limit. By understanding this early on, you can make changes to your business model that will make it more sustainable in the future.
It’s also important to look at your revenue model and make sure there is some predictability with your income. Predictability gives you numbers to offer a buyer, to show them the income they can expect.
When planning an exit strategy, it’s essential that you consider your own long-term goals. Albert always asks his clients, “What would you like to do once you exit the company?” to help them determine what their exit will look like. The answer to this question helps Albert point the client in the right direction.
Here are Albert’s final pieces of advice:
Speak to the professionals
Don’t think your business is worth a fortune
Don’t think your business is worth nothing
Selling a business is as much an emotional decision as it is financial, but it’s important to approach the sale as rationally as you can. By holding realistic expectations, you can be more level-headed and ultimately make the best decision for you and your business.