Intend to Sell Your Business? Make Sure You Do These Things NOW (Part 1)

Summary video

After a recent project, I’ve been thinking a lot about the subject of preparing a smaller company for a successful founder’s exit. In larger firms there is a robust process and standard options for how this typically goes down (IPO or mainline M&A activity), complete with an entire multitrillion-dollar industry — investment banking — largely dedicated to it. But what about smaller founder-run companies (say, under $10MM in revenue), particularly those with with decades of tenure?

Boomers are squarely in the standard retirement range right now, but sadly most Boomer-owned companies probably won’t sell. What will happen to them? If there’s an heir who knows the business and is ready to take over, great, but the multi-generational family business is not nearly as common as it once was, so expect to see less and less of these types of retirements. Without a buyer or an heir capable of taking over operations, the founder will have to keep running the company until they die, or they decide to just liquidate it and give up, or the business folds to competitive market forces because it can’t keep up with the times. In some cases, the founder may be able to sell but at a really undesirable price.

Achieving a successful founder’s exit (meaning a sale at a price and on terms you find desirable) will be the rare minority for most small business owners looking to retire, at least over the next 10-15 years. Whatever your generation, let’s talk about what you should do now to maximize your chances of a successful founder’s exit.

The Headline Recipe for Failure: When Your Company Needs You

Of all the problems that complicate or endanger a successful founder’s exit, this is the worst one and hardest to fix. It’s also exceedingly-common and is often the root cause of most or all of the other relevant problems. For some people, their company’s utter dependence on them has been by design due to their deliberate unwillingness to cede any real control and responsibility to staff; for others it’s just a matter of they never knew any better or other things took priority. In any case, you absolutely cannot expect to sell your company at a good price (or perhaps at all) if it has been built to depend upon you.

Note that ‘depend on’ and ‘derive value from’ are different. Of course your business should derive value from your presence and leadership (if it doesn’t, you have another problem). But can the business run without you or will the wheels fall off? If you can’t walk away from the company right now on a month-long hiatus and trust that things will essentially keep running in your absence, then you’ve got a serious problem.

Put yourself in the shoes of a potential buyer. Would you want to buy a company that vitally depends on the one person who is trying to leave? Doesn’t that sound like you would be left holding the bag on an asset whose value would drop dramatically and immediately? It’s like buying a brand new car, driving it off the lot, and then as soon as you’re at that first stop light your hood flies open and the engine rockets off into space. Even if you offer to stay on for a time with the buyer (a common arrangement), that doesn’t alleviate the core problem.

So how do you make sure your business doesn’t need you? If you haven’t built the company this way from the start, then changing will take time (think many months at absolute minimum, and most likely years). But like the old proverb, the best time to plant a tree is 20 years ago; the second best time is right now.

DELEGATE REAL RESPONSIBILITY: You need to trust your team to do their jobs. If you can’t (and make sure it’s truly a them problem and not a you problem), then replace them and get people you can trust. Micromanagement is never a sustainable business practice, and it’s even worse if you intend to ever sell your company. All the core functions of your business (like sales, finance, procurement, infrastructure, product or service delivery, HR, etc.) should have trained and responsible parties who can do the work apart from you. This doesn’t mean you need a large, bulky management structure; you can run lean and cross-functionally by having several key people who know how to do multiple things reasonably well. Whatever organizational structure you choose, the bottom line is you need to have people around you who collectively can run the business without you, and who you trust to do so.

BRAND THE BUSINESS, NOT YOURSELF: Do your customers know your company, or do they just know you? If you want to sell the business, then your customers need to know it. That doesn’t mean you shouldn’t also brand yourself; just not at the expense of the company, because that’s all a buyer will care about. You can still do things like appear in your company’s marketing materials (which many founders seem to enjoy doing, particularly if they’re outgoing and are recognized in the local community); it just means make sure the marketing focus is on the business and not all about you.

SHARE KEY RELATIONSHIPS: Many smaller companies are highly relationship-driven, such that a major part of the enterprise value derives from the trust that customers have in the founder. In many ways this is an asset, but when trying to sell your business it can become a problem. The way around that is to make sure your customers and vendors get to know and build trust in other members of your team. Involve your key, trusted employees in managing your most important business relationships. That doesn’t mean turn those relationships over completely (at least not yet), but it does mean make sure your key people have the opportunity to build their own relationships without you needing to be there.

HAVE A SUCCESSION PLAN, BUT HOLD IT LIGHTLY: A potential buyer may want to bring in their own General Manager or leadership team, but they may also want you to have people on the bench for them to tap into. It’s just good business to always be training and helping your top performers reach the next step, and that principle also applies at the very top. You should have at least one key member of your leadership team who is able to replace you when the time comes. Just don’t make any certain promises to them, since you can’t guarantee what a new buyer will want to do. If the buyer wants to promote a GM or President internally, then you’ve made that easy for them, which will in turn make your sale a lot easier too. If they don’t, then you’ve still prepared a talented protege to succeed in the new environment or to leave and succeed somewhere else.

These things are easier said than done, but do them you must if you ever intend to have a successful founder’s exit. For these reasons, selling a business is even more difficult (or in many cases, impossible) for solopreneurs. Sure, depending on the industry, maybe you can sell your client book to another practitioner, but not always, and often not for the price you want. After all, unless you’re selling a business with long-term contracts, there’s likely not much ensuring that your customers will stick around with a new proprietor, so don’t expect someone to pay a premium price for your clients with that kind of unknown.

In the next article, we’ll talk about some of the more operationally-focused things you need to do in order to prepare for a successful founder’s exit.

Don't miss any Customers, Costs, and Cash Flow!
Practical business insights delivered to your inbox + access to the article archives. Absolutely no spam.