According to M&A Source, 80 % of businesses on the market will never sell. This should be a huge wakeup call for all business owners, as this statistic means you have less than a 20% chance of success when you go to sell your company.
One of the chief reasons businesses don’t sell is that owners don’t think about selling until a catastrophic event occurs. This could be an internal factor–partner disputes, divorce, health issue or even death–or an external one, like the Covid pandemic, or fires, hurricane, tornadoes, government shutdowns, etc. Selling your business during a catastrophe could be detrimental in most cases if businesses’ financials are trending down. Most buyers do not like fire sales. They prefer to purchase a healthy company.
Recently, I had a frantic lady call me from Texas; she said her husband dropped dead from a heart attack at the age of 40 and left her with a mountain of debt! She asked me if I could sell his construction company. I did some probing and found out that he had no employees, just subcontractors and no processes in place. All the data was in his head when he died the business died. I felt terrible as I was not able to help her. This is why it’s so imperative to build your business to sell. This is how you set your loved ones up for success.
As Steven Covey states, “start with the end in mind!” All entrepreneurs should buy or start their business based upon the GPS Exit Model.
If you want to drive somewhere, what do you do? You pull out your phone and go to Google maps or some other app and plug in your destination. If the GPS does not know your destination, then you will end up lost or driving around in circles. Bottom line: you’ll end up nowhere! That is what happens to business owners if they do not plan their end game. Business owners do not plan to fail, they fail to plan, drifting up and down the financial hills to end up more broke, selling for pennies on the dollar, and/or closing their business.
This GPS EXIT Model was designed for businesses to Exit Rich, not poor. Business owners should determine the following in the below example:
- Their Destination (Desired Business Sales Price) $20 million
- Current Location (another words current evaluation) $5 million
Most business owners never get their business evaluated until they think about selling. Owners should get an annual evaluation checkup. There are events that increase valuations and events that decrease valuations and you should always know what your business is worth.
- Time Frame: (duration that you want to sell you company) 5 years
- Determine Who Your Buyers Are: (there are 5 types of buyers) First time buyers, Turn Around Specialist, Pegs, Strategics/competitors, and serial bearers.
- Know the Evacuation Gap: identify where your numbers (gross rev, cogs, operating expense and EBITDA) need to land for a $20 million evaluation.
- Buyers Criteria: identify the proprietary assets/synergies that will inspire a buyer to pay move for your company than the valuated price?
- Why: the last step in the GPS Exit Model, is WHY do you want to sell for $20 million? If it were easy everyone would do it. Therefore, your WHY must be powerful enough to keep you in the game, keep you motivated to weather all the financial storms and catastrophic events that might occur.
Following the GPS Exit Models will make the difference between selling for huge profits and selling for pennies on the dollar. This plan will keep you focused on your end game and help to prevent landing in the 80 % of business that do not sell.
In addition, businesses are typically not worth what the seller needs to exit as many owners have debt they need to pay off and after paying it off, they are left with very little to retire on. Most sellers think of their business as their baby. They think it’s the best and worth a lot. In my experience, most of my clients always overvalue rather than undervalue their businesses. I had a client that told me he wanted to sell for $15 million and his EBITDA was $150,000. I asked him how he came up with that price, and he said that’s what I need to retire on. Many owners base their value on what they need to enter the next phase of their life which has nothing to do with the true value of their company. Buyers don’t care about what you need, they only care about the value your business will bring them. So, if you want to sell for $15 million, then utilize the GPS Exit Model to build the 15 million dollar company of your dreams.