Welcome to Dakota Business Group, this is Matt Stone the Cash Out Coach. Today we’re going to discuss four essential questions every business owner must answer before you get ready to sell your business. Not only will these four questions help you cash out of your business, but they will also help you grow your business, because in essence what you are doing is establishing a goal for you and your business. Once you’ve identified the goal you can begin the process of developing strategies and creating tactics to achieve it.
The first question is “Who do you want to sell your business to?” Most business owners usually don’t answer this question until they get ready to sell it. It can be a tough question especially if you’re just starting out. In fact, why would you be thinking about this question? You’re trying to grow the business. The last thing on your mind is selling it but remember these four questions are helping you establish a goal not only for you, but for your business. So perhaps your goal might be to sell to a buyer who is willing to pay an unreasonably high multiple or maybe it’s more important for you to leave a legacy and have your kids take the business over. Perhaps you have employees who have expressed interest in buying the business from you when it’s time. Goals can and do change overtime. Without a goal, you cannot aim at a target that may move.
Or maybe even transfer the business to the next generation. Not having an answer to this question is the single largest cause for a transaction to fall apart at any time, especially at the closing table. I can personally attest to this. When I sold my last business, I had very definite and specific plans. Knowing this, I still developed cold feet at the closing table. Why wouldn’t I? The business was a part of me. It was hard to let it go. If I had not had these definite and specific plans, I may have walked away from the closing table and a successful transaction.
When I ask this of business owners the most common response is three to five years from now. For some it may be a legitimate timeframe but what I have found is that, for most, it’s a triggered response. It’s a trigger response because who wants to talk about leaving their business? After all, we just talked about how it’s a part of you. Why would we want to talk about it? In reality, we will all leave our businesses, but we have to decide if it is going to be on our terms or is it going to be on somebody else’s terms? One thing I’d like to point out in the question, it says “when”. Don’t get into the box thinking you have to establish a date or a time. You can establish an event as to when to sell your business. I had a client who had a crop insurance business. He determined once corn hit $7.00 a bushel it was time for him to sell his business. By identifying when he wanted to sell his business, he was now able to make changes to the business well in advance to improve the value of it. It also helped him identify several qualified buyers that he can go to before the transaction date. This all helped him have a speedy and successful transaction.
The last, how much do you need. This is actually a two-part question. The first part is how much do you need in retirement to achieve the desired lifestyle that you want. To help you answer this question we’d recommend that you work with a financial advisor. Instead of retirement, you might ask, how much do I need to fund my next adventure? By answering the first part of this question you can now answer Part 2. And that’s how much do you need, not necessarily how much do you want, for the business but how much do you need. In order to either get your retirement lifestyle financed or finance your next adventure? By answering this question if you end up short you will now have plenty of time to make changes to the business to help increase the value of it. Remember, you need a minimum of three years for those changes to be reflected in your financial statements. Ideally you wanted five to 10 years of time to make those changes.
The secret to a successful transaction is not answering these four questions. The secret is in planning, but these four questions will help you in your planning.
Our primary objective today was to provide you with information of value. Let us know if there is a specific topic you would have a particular interest in and we will create a video or include it in our blog. Here is to your business, your future, your way!