Welcome to the hardest decision you’ll ever make as an entrepreneur. While it’s tempting to stick with a run of financial success for as long as possible, it’s important to understand what you might leave on the table if you wait too long to cash out.
In fact, putting your business up for sale while it’s on top might be the wisest entrepreneurial move you ever make. That’s right — smarter than the idea that launched the business in the first place. It’s not an easy choice for founders like you who are emotionally invested in their companies.
But let’s get real. Leading a company through the various stages of its life cycle requires skills you may not have. In general, when small businesses cross a certain revenue threshold — typically $5 million to $10 million — the biggest obstacle to future success is usually the founder. You might believe you are the next Jeff Bezos, but it may be time to swallow your pride, hand over the reins to a professional management team and take the money.
That’s how it should work, but too often entrepreneurs sell their business only after something forces their hand, such as a divorce or an acrimonious split with a partner — or when they face a declining market or bankruptcy.
“Businesses that have gone flat or, worse, are trending downward will have a tiny universe of buyers. As a result, their ability to negotiate the value and terms will be compromised,” warns Abe Garver, managing director of Palm Beach, Fla.-based M&A advisory firm BG Strategic Advisors.
Buyers want to know they’re making a profitable investment and want to see evidence of solid past performance. The good news is that they don’t need to see much: Even one quarter of consistent growth can yield big returns. The point is you’ve proved that your company is still capable of upward moves.
Still, I realize it’s shortsighted to bank a successful sale solely on your last quarter’s P&L statement. Even when earnings look strong on paper, the bulk of the profits could be tied up in accounts receivable. Without adequate cash flow, you will eventually be forced to turn to expensive debt to fund your day-to-day operations, a move that could very well jeopardize the marketability of your business. Buyers want to see strong working capital, which indicates a company’s underlying operational efficiency. If you do have debt, pay close attention to your cash flow-to-debt ratio, Garver suggests. The higher the percentage, the better the company’s ability to carry its debt and the more attractive your business will be to buyers.
You may think that nothing I’ve said here concerns you because you’re making more money than you thought possible from your business, or you’ve got no problem waiting patiently for the right offer to come along. In fact, you’re exactly the type of business owner I’m trying to reach. Both of those scenarios are indicative of company strength, so it may be the ideal time to get a lucrative deal done. The question is, Are you smart enough to do something about it?