(Pictured: After a marathon run)

According to a recent study, only 5% of owners were happy with selling their business. 75% of business owners regretted selling their business after one year. This is shocking, especially considering that the majority of business owners plan to sell their business. 

Today, we are going to focus on how to reduce your level of regret, by learning how to maximize the value of your business before you sell it.

Let’s start with the fact that running a profitable business is hard. According to Fundera.com, 20% of businesses fail within the first half and 50% fail in their fifth year.

One of the most exciting things for a small business owner is getting the opportunity to sell your creation. Creating a business is enough of a challenge on its own, but selling a business is a whole different opportunity. This enables you to create value beyond earnings and profits each year. If you’re familiar with the standard protocol for selling a company it is EBIDTA times multiple. The multiple is specific for your industry and size of your company. 

What most owners don’t know is that multiples can increase or decrease, based on the risk of your business.

This is the secret of private equity owners planning to buy your business. They are looking for something that is undervalued, and they are hoping to create more value by eliminating risk.  If the CEO has to be involved in all of the operations of a company, acquiring that company is a high risk. Because if the CEO doesn’t like the new private equity ownership, they may want to leave. This is extremely common. There is an expectation that the outgoing or the existing CEO will be involved in the operations for the next 2 to 3 years. They have to meet certain agreed-upon expectations before getting the full amount of their buyout.

(Picture: Marathon Run)

And if you’re selling to private equity versus a strategic investor, they’re looking to increase the value based on your inefficiencies. They want to fix those over a 2 to 3 year period, combine that with growing your business, and then sell it for a bigger value down the road.

And one of these common examples is to get rid of the existing CEO management and bring it in with the new management who can help professionalize the company.

With the new management, they get to take advantage of those efficiencies and have a professional manager, or professional operator, run the company to get ready to sell it to its next set of private equity investors.

Often the CEO who is selling the company is unaware of this gap.

Whether they are not willing to improve the efficiency of the company, or decrease the risk, or they don’t know how to, or they don’t feel like they have the financing to complete those actions.

But the problem is, they don’t realize how much money they might be leaving on the table by selling the company without fixing these efficiencies before selling.

This is a separate note clearly, the next book in the Lost at CEO series has to be with how to apply these 40 strategies with our main character.

What is really fascinating, is when some organization will sell their business they worked for for sometimes like 23 or four times what their company is making in many cases this is what the CEO would earn as take-home pay.

In many cases, a CEO gets to a point where they feel like they have to retire because they’re getting older, losing energy, or they don’t feel like they have what it takes to take the company to the next level.

But is it really worth selling it for only 2 to 3 or four times more earning when you rather get something that’s 67 or 68 times higher compared to what you’re getting today?

Let’s look at a couple examples:

Let’s sell your business today that is earning $1 million at a three multiple. This seems like a lot of money but then you have to cut in half for taxes. You have $1.5 million. That is a lot of money from one perspective but how long are you gonna actually be able to live on that $1.5 million?

Instead, let’s say you decided to invest in the company to decrease the risk and increase the multiple. Let’s say you move the multiple from 3 to 4 that is now $4 million and pre-tax revenue or $2 million. Now let’s take another step over let’s move it up to five.

Solving some of these risk areas for you they have tremendously more value if you wait 2 to 3 years to fix these things prior to selling it.

The interesting part is when you start removing the risk in your company you might actually find it to be more enjoyable. You could become more of a shareholder rather than with a risky company that’s just trying to do whatever they can to create value out of it.

Now, let’s increase value and decrease the multiple, but you increased the earnings. If, say over three years, you’re able to increase the earnings from one to 1.5 million, a 50% increase for the next three years.

$5 million times a five multiple, the next thing you know, you’re getting 7.5 million gross compared to $3 million that you were willing to sell it beforehand.

And then you can pick and choose, who would be the best targets for your company to be acquired by, whether you want to go towards private equity, or a strategic investor because the value has been created and you also have a business that you enjoy working with now, which may reduce the stress of you working with it.

The value of planning ahead and getting your company ready for sale by focusing on the right right value drivers can be extraordinarily rewarding. Here’s a calendar link to my Director of Operations, Tonya Smith, who could get us set up with the best next steps to understand how we may be able to help you. 

(Picture: Marathon Run)

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