Planning to sell your business as you get closer to retirement
Norm Brodsky is a veteran entrepreneur.
Dear Norm, I'm the majority owner and CEO of a logistics management business with a blue-chip client list and an excellent reputation. In addition to running the company, I also have responsibility for sales and marketing, as well as managing our relationships with clients. I'm now in my early 60s, and it has dawned on my partners and me that we need to have an exit strategy. But I've discovered that, while I know a lot about how to develop and deliver high-quality services, I know very little about selling a business. If I want to get the best possible deal, where should I begin?
-- Mike Barto West Point, Virginia
I couldn't answer Mike without knowing more about his situation, so I gave him a call. (I've changed his name at his request.) He told me that his company had annual sales of $1.5 million, with net pretax profit of about 30 percent. That put his EBITDA -- earnings before interest, taxes, depreciation, and amortization -- around $450,000. I asked him how much he hoped to sell the business for. He said he was thinking of $4 million to $5 million, or about 10 times EBITDA. I told him I'd be astounded if he could find a buyer willing to pay anywhere near that much.
These days, companies tend to be valued at four to six times EBITDA. In order to get the higher multiple, you need to show a history of steady growth. Mike's company has grown a bit in recent years, but not enough to qualify for a higher multiple. You also need to have "sticky sales," or recurring revenue from customers that are locked into the company for one reason or another. Only half of Mike's sales are repeat business. What's more, he is critical to the operation: He does all the selling, and his experience and expertise are important factors in closing a sale.
I suggested he begin by identifying potential buyers -- perhaps a large consulting firm looking to get into his field, or maybe a company in a business related to his. The point is to investigate what potential buyers would be looking for. Meanwhile, he should map out a two- or three-year plan to train someone else to do his work. Unless he gets lucky and finds a buyer in his own industry, he'll have an extremely hard time selling the business as long as it can't operate without him. In the long run, moreover, he'll be able to get a better deal if he makes himself expendable while he's still running the company, rather than having to stay on after a sale to train his replacement.
Norm Brodsky (firstname.lastname@example.org)is a veteran entrepreneur. His co-author is editor-at-large Bo Burlingham. A paperback edition of their book, The Knack, was published in February under a new title, Street Smarts: An All-Purpose Tool Kit for Entrepreneurs.