By: Jack Ellsworth
Most business owners think exiting or selling their business is a sprint, but the reality is it takes a long time to transition out of a company.
In a sprint, the sound of the gun sends you leaping forward out of the blocks. Within seconds, you’re at top speed and soon your eye is searching for the next hand, and you pass the baton to the next person. You quickly transition to an easy jog and smile, knowing that you did your best and that now the heavy lifting is on someone else’s shoulders.
That’s probably how many people think of starting and exiting a business: as something akin to a sprint. You start from scratch, build something valuable, sprint into the waiting arms of the ideal buyer as they hand over a big check, and you ride off into the sunset.
But unfortunately, the process of exiting your business looks more like an exhausting 100-mile ultra-marathon than a 100-meter sprint. It takes years and a lot of planning to make a clean break from your company – which means it pays to start planning sooner rather than later.
So when should you start? Consider the following steps:
Step 1: Pick your “eject” date
The first step is to figure out when you want to be out of your business. This is the day you walk out of the building and hand over the reins to someone else. Whatever your goal, the first step is determining when you want out and what you will do after you exit, with whom, and why.
Step 2: Estimate the length of your “earn-out”
Assuming your exit involves selling your business (rather than gifting it to someone else), chances are good that you will get paid over a period of time. Most likely, you’ll get the first check when the deal closes and additional payments at some point in the future — if you hit certain goals set by the buyer (this process is called an “earn-out”). The average earn-out these days is three years, but it could be shorter or longer, depending on your circumstances.
Step 3: Estimate the length of the sale process
The next step is to figure out how long it will take you to negotiate the sale of your company. This process usually involves hiring an intermediary (an exit/succession planning consultant, putting together a marketing package for your business, shopping it to potential acquirers, hosting management meetings, negotiating letters of intent, and then going through a 60 to 90-day due diligence period. From the day you hire an intermediary to the day the check hits your bank account, the entire process usually takes six to 12 months.
Step 4: Create your strategy-stable operating window
Next you need to budget some time to operate your business without making any major strategic changes. An acquirer is going to want to see how your business has been performing under its current strategy so they can accurately predict how it will perform under their ownership. Ideally, you can give them three years of steady operating results during which you didn’t make any major changes to your business model.
Step 5: Getting to the starting line
The final step is putting all of this together. Let’s say you want to be completely out of your business by age 55. You plan for a three-year earn-out, which means you need to close the deal by age 52. Subtract one year from that date to account for the length of time it takes to negotiate a deal, so now you need to begin marketing your company by age 51. Then let’s say you’re still tweaking your business model – experimenting with different target markets, channels, and models. In this case, you need to lock in on one strategy by age 48 so that an acquirer can look at three years of operating results.
It certainly would be nice to make a clean, crisp break from your business after an all-out sprint, but for the vast majority of businesses, the process of selling a company is a long, multi-year marathon where you can easily get bogged down. So the sooner you start, the better!