Stay Updated
Stay informed with our deal announcements, our market insights, and our research concerning founders and families pursuing their most complex strategic and financial challenges.
Menu
The best thing you can do for your business is to plan your way out of it
- Al Salas
Successful entrepreneurs are good at setting measurable goals. If you’re like most owners, you have a profit goal you want to achieve. You may also have a top line revenue number that’s important to you. While those goals are undoubtedly important, there is perhaps another objective that may have an even bigger payoff — building an enduringly valuable business that you can actually sell for a worthwhile price.
What if a sale of your business is far from your mind? That question is proving to be increasingly irrelevant. The inconvenient truth of the M&A market for founder-lead companies is that a majority of such businesses are simply not sellable in their current state, at least not at a worthwhile price. As many as eight out of every ten private companies being led by their founders will fail to transition to new ownership, according to research from Pepperdine University. That means many private companies may provide cash flow to owners today, but are not yet a highly reliable source of long-term wealth for tomorrow. Below, I’ve identified five reasons why building a more sellable, more fundamentally valuable business should be your most important goal, regardless of when or how you pursue an exit.
SELLABILITY MEANS FREEDOM
One of the principal tenets of a company’s value in the marketplace is how well it would perform in the rare event its owners were unable to work for a while. As long as your business is dependent on you personally, there’s not much to sell. Your company’s next owner — if you are fortunate enough to get a deal done — is likely to be a much larger company or an investor group that is ill positioned to run your company on a day-to-day, hour-by-hour basis. Making your company less dependent on you by building the right management team and creating effective processes and performance benchmarks for your employees to follow enables you to spend time away from your business while also making it the kind of business a new owner can reliably oversee from a distance.
SELLABLE BUSINESSES ARE MORE FULFILLING TO OWN
Running a business would be much more fun if owners could spend their days on strategic thinking and the big picture ideas that drive innovation and disrupt industries. Instead, most business owners spend the majority of their days on operational minutia: managing the sales team, meeting large customers, fighting fires, completing performance reviews, managing liquidity, and answering the auditor’s questions. The more emotionally taxing details of company ownership can suck the joy and excitement out of owning a business, yet it is exactly these tasks that must be engineered into someone else’s job description if a business is ever going to pass the due diligence phase of an M&A sale process.
SELLABILITY IS BOTH FINANCIAL SECURITY AND RISK MANAGEMENT
Each month millions of investors open their brokerage statements to see how their portfolios are doing. They do so not because they are looking to sell their portfolio, but because they want to know where they stand on the journey to financial freedom. Building your business with its sellability in mind delivers similar peace of mind, knowing that you’re building something that can — like a stock portfolio — have measurable market value that you could choose to make liquid one day.
Speaking of portfolios, owning multiple stocks and bonds is far safer than putting your savings into a single stock. In a certain sense, your business is like a concentration of wealth in a single stock. Acknowledging this exposure can motivate you to identify real sources of risk in your business and ways to mitigate those risks. Buyers of private companies are particularly adept at finding sources of business risk. They use what they discover in a due diligence process to discount a business’s value, or sometimes they just walk away altogether when they perceive too much risk. By thinking ahead about what can go wrong in a business (and how personal appetites for risk and reward change over time) the savviest business owners actively manage their exposure to business risk and pursue sellability as a diversification strategy that both creates and preserves long term wealth.
SELLABILITY IS A GIFT
Your current succession plan may involve passing your business on to your children or letting your managers buy into your company over time. These are both admirable exit options. That said, if your business is not built to access the private capital markets, it will not offer reliable financial stability to those stakeholders who will benefit from succession. Sellability enables both you and your successors to contemplate different exit options, different ways of measuring and distributing the wealth that a well built business represents.
GOOD THINGS TAKE TIME
There are some things in life that take time, no matter how much you want to rush them. The work of making a business more sellable and building its value over time often requires significant changes. Sophisticated buyers will want evidence of reliable and predictable performance over time — usually three years worth of historical results — before they place faith in the future prospects of any business. Therefore, an owner who is contemplating selling in five years will need to start making the business sellable now so the changes have time to gestate.
