Question
What's a common mistake that an entrepreneur will make when selling a business?
Answer
Well, I think the biggest one is waiting too long to sell. The length of time between the day the owner says, "Yeah, I want to sell," and the day that they actually hand over the keys is usually multiple years. There is at least a year associated with the actual transaction. Fine tuning the business to get it ready to sell, working on the marketing approach, negotiating the sale, and performing due diligence, usually takes between six and 12 months. There's a year of your life gone.
Then you've got the earn-out period. That could be, if you are lucky, a simple transition period where you've got to work in the business for six months or a year to make sure that the new management team is in place. That's rare. What is much more common is an earn-out where the acquiring company says, "Great, we’ll buy your business but we are going to give you 50 cents on the dollar upfront and the rest of it it's going to be contingent on future performance." Depending on the industry, it can be three years, but it can go as high as five or even seven years. Three years is a standard length of an earn-out.
So take the standard length of the earn-out of three years. You add a year that it takes to sell a business. There is four years of your life gone, after you've made the decision to sell your business. Most business owners make the mistake to say, "I want to hit the eject button when I am (fill in the magic number), 50 or 60." They don't realize that there are another four years that they are going to have to work in the company. Also, the earn-out period is one where you still have to have energy, enthusiasm, and excitement for the business because that's the only way you are going to hit the goals that the acquiring company has put for you.
I am of the mind that most business owners ride it over the top. They stay too long, they wait and try to time the market so it's just perfectly maximized and then hit the eject button. But if they do that, they are going to have no energy for the earn-out, no energy for the year of the transaction.
The worst thing you can do in the middle of the transaction, if you've got a potnetial buyer on the hook, is to show that three months into negotiation process, your top line revenues or profitability starts to dip. There is nothing that gives acquirers cold feet faster than your performance starting to dip in the actual transaction.
My advice is to take your 'best before date', the day you want to be on the beach and move it up by five years. Say to yourself, "I may leave a little bit of money on the table but I'm not going to ride this thing over the top."
Then you've got the earn-out period. That could be, if you are lucky, a simple transition period where you've got to work in the business for six months or a year to make sure that the new management team is in place. That's rare. What is much more common is an earn-out where the acquiring company says, "Great, we’ll buy your business but we are going to give you 50 cents on the dollar upfront and the rest of it it's going to be contingent on future performance." Depending on the industry, it can be three years, but it can go as high as five or even seven years. Three years is a standard length of an earn-out.
So take the standard length of the earn-out of three years. You add a year that it takes to sell a business. There is four years of your life gone, after you've made the decision to sell your business. Most business owners make the mistake to say, "I want to hit the eject button when I am (fill in the magic number), 50 or 60." They don't realize that there are another four years that they are going to have to work in the company. Also, the earn-out period is one where you still have to have energy, enthusiasm, and excitement for the business because that's the only way you are going to hit the goals that the acquiring company has put for you.
I am of the mind that most business owners ride it over the top. They stay too long, they wait and try to time the market so it's just perfectly maximized and then hit the eject button. But if they do that, they are going to have no energy for the earn-out, no energy for the year of the transaction.
The worst thing you can do in the middle of the transaction, if you've got a potnetial buyer on the hook, is to show that three months into negotiation process, your top line revenues or profitability starts to dip. There is nothing that gives acquirers cold feet faster than your performance starting to dip in the actual transaction.
My advice is to take your 'best before date', the day you want to be on the beach and move it up by five years. Say to yourself, "I may leave a little bit of money on the table but I'm not going to ride this thing over the top."
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Written by John Warrillow
John Warrillow is the founder of The Sellability Score and author of the book "Built to Sell: Creating a Business That Can Thrive Without You". Throughout his career, John has started and exited four companies and is a sought-after speaker and angel investor.
John's new book, The Automatic Customer: Creating a Subscription Business in Any Industry, is scheduled to be released in February 2015.
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