In our first post on exiting business ownership timing, we highlighted how selling your business at the “right” time exists at the intersection of proper preparedness and these three timing conditions:
1. The economy is expanding
2. The business is growing
3. The owner is ready personally and financially
In part one; we discussed how the economy has cycled through expansion and contraction in each of the last three decades. The sweet spot (expansion phase) for exiting at the top occurred approximately mid-decade in the 1980’s, 1990’s, and 2000’s, while the same decades started and ended at a low point (contraction phase).
If the economy follows the same cyclical path in this decade and the next, we have a sweet spot in three to five years from now, followed by a contraction near 2020, and another sweet spot near 2025.
2. The Business is Growing
The second condition – the business is growing – represents another timing opportunity to prepare for and exploit if we are selling at the top. The good news is that an expanding economy should lead to business growth. As they say, “a rising tide raises all ships.” Taking advantage of this condition however, holds its own timing and preparation strategies.
Because the other side’s Gang of 5 (potential buyer, bankers, appraisers, accountants and attorneys) view business value three parts history and three parts future, the best strategy is to time the exit before the business reaches the top of its next growth curve. More specifically, the business should demonstrate three years of documented historic growth and three years of reasonable future projections.
Start by creating the three-year look back (due diligence documentation) – the future of the business needs to show related to growth. There are countless items to address (use this link for a look at a standard Due Diligence Request List), but the most important question in terms of growth the owner needs to answer in three years from now is: “What led to the growth, and how do I know it will continue in the foreseeable future?”
Create a Business Development Dashboard
A Business Development Dashboard is a relatively simple yet powerful tool that answers that important question.
Using an accounting program or hiring an advisor fluent in Excel, create a spreadsheet listing all of the various marketing initiatives the business uses or will add in the immediate future. Note: This list could be quite different today compared to three years ago. Today, internet/social media marketing can benefit nearly every business. Contact us for an unbiased review of your current platforms and strategies.
For each activity, track the number of leads, revenue, margin, and cost per lead generated on a periodic basis (could be daily, weekly or monthly depending on the business).
In no time at all, the owner will not only be making wiser decisions about how to grow, but will also have detailed the history of growth and basis for future projections.
In conclusion, imagine it is 2015, and the economy is “right,” the business’ numbers are up in each of the last three years, and the buyer asks that fateful question: “What led to the growth, and how do I know it will continue in the foreseeable future?” Answer: The owner delivers an impressive, compelling and credible detailed analysis.