Today I am focused on one way to lower risk when selling your business and it might be one you haven’t thought of.
Every week I am talking to business owners about their exit planning (not selling, but being prepared to run their company with best practices and profits now and having the best options when they do sell) and I am always struck at how linear their thinking is initially. Most of them (and perhaps you) have a context they assign to selling their business around selling it all at once.
While that is possible and common, it also increases risk to you. The analogy I use when talking to business owners that are in financial services is one they easily understand: Would you sell every stock/investment you own on the same day at the same time?
The easy answer is no in most cases.
Applied to selling your business it can be as simple as what we in the exit planning space like to describe as “taking some chips off the table”. You sell a portion of your business, either internally or externally, to someone else. This can allow you to ‘de risk’ your overall portfolio (of which your business is almost always the largest position) by reallocating some of your business position to other investments.
You can even maintain a majority equity position and keep running your company as you wish.
Within the financial services industry, if possible, this can also be done on an annual basis with something as simple as selling the bottom 10% of your ‘book’ every year. If you have what I call a lifestyle practice (making great money but focused on your quality of life) this can be a great way to dramatically reduce the amount of clients you serve while increasing the profitability of you and your team.
In fact, if you have a predictable referral marketing plan, you can have absolute confidence that your practice will be continuously evolving in value and be a joy to run.
Another way you can use selling a portion of your business to lower risk is by bringing in a strategic partner that will add to your talent pool and resources. You get to take the chips off the table personally, while adding to the ability of the firm to grow and increase in value. Often, when done well, this can actually create an overall exit value that is higher than the one time exit. After all, if you continue to take chips off the table from a growing stack you are going to have a bigger number.
The other reason to look at a sequence or multi-stage exit is that it allows you to be potentially more resilient in the process of selling your business. Once you get committed to selling the whole ‘enchilada’ emotionally, I find that selling owners can be vulnerable to leverage later in the selling process that can result in discounting and less favorable terms.
Since you have, in effect, checked out already you might have a hard time walking away from the deal. This has happened to me, personally, in the past and it is a bitter pill to swallow and had a catastrophic impact on my family and our finances.
There is a lot more to learn and think about on this subject and we won’t complete the process here. Some places to get started if you are a business owner:
- Buy a copy of Walking to Destiny
- Visit the Exit Planning Institute website for a wealth of knowledge: https://exit-planning-institute.org
- Follow the hashtags #cepa #exitplanning
As always, if you have some questions and/or comments please feel free to add them below or contact me directly.
All the best,
Mike
