The last time I checked, the mortality rate continued to hover right around 100%, which means your business isn’t going to be yours forever. You’re going to sell it, shut it down, or pass it down a generation. An estimated 70% of businesses don’t have a family member capable or willing to assume responsibility. What are you doing to plan for the sale?
Here’s what you should do:
1. Check Your Ego: If you’ve built an acquirable business, you’ve had success. Congrats. You should be proud of your accomplishments. However, you should also be realistic in your self-assessment. As Charles de Gaulle once remarked, “Graveyards are filled with indispensable men.” Have a clear understanding of your role and how that role can be transferred.
2. Be Irrelevant: It’s counterintuitive, but one of the best things you can do to be acquired is prove that you’re irrelevant. Why? Your business is only worth what someone else can do with it. If you’re the glue, the strategy, the HR department, and the driving force, you’re screwed. A healthy layer of quality, non-owner leadership is key. The more you’re involved, the less your business is worth.
3. Become Known: Think of acquirers like clients. How will they find you? Being visible is the key. Attend conferences, participate in the community, and become a thought leader. There’s an old adage in acquisitions that says, “Never buy anything that’s for sale.” It’s highly unlikely the right buyer will magically appear, so treat potential buyers like potential clients and become known.
4. Develop Great Systems: Great systems allow you, or a potential buyer, to run the business without being present. Systems institutionalize expertise, leading to organizational consistency, quality, and true residual value. Again, your organization is only worth what someone else can get out of it. Spend time and resources on developing systems. It will pay off.
5. Clean Up the Financials: Van Halen, the legendary rock band, was notorious for its diva-like behavior, requiring a pre-concert bowl of M&Ms with all the brown ones removed. If they showed up and there were brown M&Ms, they refused to play. What does that have to do with your financials? Well, this high-maintenance behavior was genius. Van Halen’s setup required tremendous precision — even the smallest deviation could endanger fans and the band. If there were no brown M&Ms, no worries. But a single brown M&M meant other details were also likely skipped. It was their canary in the mine. For acquirers, financials are the canary. I’ve never seen a well-run firm with messy financials. Have them done professionally. Know them intimately. Be able to answer questions about them with ease.
6. Make a Profit: Despite gobs of wishful thinking, the value of all businesses comes down to one valuation methodology. Businesses are worth the present value of future cash flows. Let me repeat that: Every business is worth the present value of future cash flows, without exception. Your users, real estate, machines, systems, personnel, and customer relationships are worth the cash they will generate, discounted back to the present. Being profitable today clearly demonstrates earning potential and provides a clear pathway to a fair valuation.
7. Develop Reasonable Expectations: Unless your profits are exploding, or the business is pushing over $100 million in revenue, your company isn’t worth anywhere close to 10x EBITDA. For an average business, as measured by customer diversity, industry, and past consistency, with less than $1 million of earnings, your expectations should be between 3x and 5x EBITDA. As the size of revenues and profits increase, or the business becomes clearly less risky, the multiples can push upwards to 7x. Expect a portion of the sale price to be seller-financed and for some of the amount to be contingent on future performance.
8. Focus on Continuity: This applies to clients, partners, employees, and vendors. Little turnover shows stability, cohesiveness, and long-term value. The biggest danger in an acquisition is a lack of stability. The longer the tenure of your relationships, the deeper the roots, the better the communication, and the more grace you’ll have for the challenges that will inevitably pop up.
9. Be Transparent: During a recent potential acquisition, we received the requested information, and the deal looked great. We started due diligence and, lo and behold, the more we dug, the fuzzier things became. He calculated his net income by picking a number. He fudged his top line. He didn’t disclose big settlement payments for a significant legal liability. Ultimately, the truth comes out, so be transparent. Your acquirer will find it. Just disclose it — it will save you time and preserve your credibility.
10. Maintain Perspective: Please don’t send potential buyers reports about industry multiples derived from billion-dollar cash and stock transactions executed by multinational corporations. Not only is it not the same ballpark, it’s not even the same game.
This post was originally published on Forbes.