Published on Wednesday, October 4, 2017

4 Steps to Determine Seller’s Exit Date

Most business owners think selling their business is a sprint, but the reality is it takes a long time to sell a company.

Picture this: the sound of the gun sends blood flowing as you leap forward out of the blocks. Within five seconds you’re at top speed and within less than a dozen your eye is searching for the next hand. Then you feel the baton become weightless in your grasp and your brain tells you the pain is over. You start an easy jog and you smile, knowing that you did your best and that now the heavy lifting is on someone else’s shoulders.

Step 1: Pick the final transition date

The first step is to figure out when the owner wants to be completely out of their business. This is the day he/she walks out of the building and never comes back. Maybe he has a dream to sail around the world with his family and grand kids while they’re still young. Perhaps she wants to start an orphanage in Bolivia or take over a winery in Tuscany.
Whatever the goal, the first step is writing down when they want out, then jotting some notes as to why that date is important, what they will do after the sale, with whom, and why.

Step 2: Estimate the length of the earn out period

It is then vital that the owner understands the following: When you sell your business, chances are good that you will get paid in two or more stages. You’ll get the first check when the deal closes and the second at some point in the future -- if you hit certain goals set by the buyer. The length of your “earn out” will depend on the kind of business you’re in.

The average earn out these days is three years. If you’re in a professional services business, your earn out could be as long as five years. If you’re in a manufacturing or technology business, you might get away with a one-year transition period.
Estimate: 1 to 5 years

Step 3: Calculate the length of the sales process

The next step is to figure out how long it will take to negotiate the sale of the company. This process involves hiring an intermediary (a mergers and acquisitions professional, investment banker or business broker), putting together a marketing package for the business, shopping it to potential acquirers, hosting management meetings, negotiating letters of intent (LOI), and then going through a 60 to 90-day due diligence period. From the day an intermediary is hired until the day the wire transfer hits the seller’s account, the entire process usually takes six to 12 months. To be safe, budget one year.
Estimate: ~1 year+

Step 4: Create a stable operating window
Next the owner needs to budget some time to operate the business without making any major strategic changes. An acquirer is going to want to see how the business has been performing under its current strategy so that they can accurately predict how it will perform under their ownership. Ideally, one provides one to two years of operating results during which there are no major changes to the long-standing business model.
If the owner has been running the business over the last couple of years without making any strategic shifts, they won’t need to budget any time here. On the other hand, if they plan on making some major strategic changes to prepare the business for sale, add a year from the time changes are implemented.

Figuring out when to sell
The final step is to figure out when to start the process. Let’s say the owner wants to be in Tuscany by age 60. Terms call for a two-year earn out, which means the deal needs to close by age 58. Subtract one year from that date to account for the length of time it takes to negotiate a deal; so now the owner needs to hire an intermediary by age 57. Then let’s say they’re still tweaking the business model – experimenting with different target markets, channels and models. In this case, they would need to lock in a stable strategy by age 56, so that an acquirer can look at one year of solid operating results.

If you (or your client) would like to find out how potential acquirers might view a particular business and, more importantly, discover how to apply a proven process to drive up company value CLICK HERE. You will be taken to a free, 15-minute questionnaire. There is no obligation to obtain your Value Builder SystemTM score.

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Author: Lewis Martin

Categories: Advisory Services



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