What successful business owners who sold their business don't tell you

When preparation meets opportunity

A couple of years ago, I had coffee with Sarah, who sold her specialty food manufacturing business for an undisclosed amount. In our conversation, she revealed to me that she was able to negotiate a price beyond her expectations even. When I asked her about what exactly helped her during these negotiations, she laughed. She looked at me with a serious face and said she started preparing to sell five years before she actually did. The business was 15 years old when it sold.

Here's what most business owners get wrong: They decide to sell, then try to make their business sellable. That's like trying to get in shape for your wedding after you've already sent the invitations.

“The number one reason that businesses are not sellable is because the owner did not plan their exit." -Michelle Seiler Tucker, Leading authority on buying, selling, fixing, and growing businesses.

Selling a business is not something that happens overnight. And the tough reality? Most businesses aren't sellable at all.

The U.S. market for businesses valued under $10 million sees approximately 50,000 annual listings with 9,500-10,000 completed sales according to BizBuySell. That means about 20% of the business owners get to transfer their company to a buyer. It is a tough market.

So if you are serious about selling your business, let's start with the basics.

The Non-Negotiable Basics

Every serious book author that addresses private equity will tell you that your business needs to cover the basics in order to become an acquisition target. But what does it mean? I tried to make it easy and broke it down into three parts:

- Profit: Are you profitable?

- Growth: can your business show growth in the last 24 months?

- Owner risk: Do you have an operator in place?

Let's dive in.

First of all, Is your business consistently profitable?

Not just profitable last year. Not just breaking even with "great potential". Buyers want to see at least 3-5 years of solid, predictable profits. They're not buying your dreams, they're buying your proven cash flow.

One of our partners thought she was ready to sell because she had one stellar year. The first question from serious buyers? "Show me the last three years" She couldn't. That one great year looked like an anomaly, not a trend. The negotiations ended before they could even start.

Unless you are in the technology industry or have other ways to leverage and defend your company value, not having a profitable business might be the end of the conversation with a potential buyer.

Second, is your business growing steadily?

Experienced buyers will dissect your financials like surgeons. Although I won't go into detail today. Buyers are mostly looking for signs of growth:

• Year-over-year revenue growth, even 5-10% shows health

• Expanding profit margins, it proves you're getting better, not just bigger

• Customer retention rates, new sales are good, but keeping customers is gold.

• Diversified revenue streams, I wrote earlier about this. Check it out.

  
  

If you've been stuck at the same revenue for three years, you're not maintaining - you're declining in value. Inflation, anyone?

I get that not every business owner out there is an excel sheet master that has their numbers straight day in and out. Although I do know a few 🤓. However, if you are not that type of person, you need to get someone who is. Your numbers are how you defend your business in a negotiation, and you need to know them well, aka a financial advisor. If you don't believe me, just watch a few episodes of Shark Tank 🦈

Now the next one is a biggy: if you disappear tomorrow, who would run your business?

I know that what I am about to say might sound harsh. But trust the hard data. Research shows that only 10-20% of small businesses successfully sell, with owner dependence identified as the leading barrier.

This is where 80% to 90% of sellable businesses become unsellable.

It is the Golden Cage Test, if your business can't run without you for 20-30 days, you don't have a business, you have a job with employees.

Educated buyers aren't just buying your P&L, they're buying what happens after you walk out the door. They'll dig deep into every customer relationship, asking themselves: "Will these clients stick around when Sarah's gone?"

A research done by the Association for Corporate Growth's compiled from 400+ private equity firms, the study demonstrates that middle-market transactions (those between $10M-$500M) achieve higher success rates than smaller deals, partly due to more sophisticated management structures and reduced owner dependence.

Most small businesses will fall under the lower middle market, this means businesses under $10M enterprise value. Based on practitioner experience and observation, owner dependence is widely believed to be a barrier to business sales.

Buyers compensate for risk with discounts, and an owner-dependent business is a risky purchase. Not having a manager who can run operations when you are not there has Key person risk discounts. Here's their mental math: your valuation could be cut in 10-25%. The more they need you, the less they'll pay.

Think of it this way: Would you pay full price for a car if the seller said, "By the way, only I know how to start it"? Neither will they.

Sarah told me the hardest thing she did was promote her operations manager and step back. "For six months, I only worked on the business, not in it. Some days I felt useless."

Turns out, making yourself useless is the most valuable thing you can do when you want to sell your business.

The counter to that is that often, owners get asked to stay for one year or two as they train someone to do your job. But again, not without a discount on your company value. After all, the buyer is still absorbing the risk, right?

Here's what Sarah knew that most business owners discover too late: Sellable businesses aren't built in the final year—they're built every year.

This week, audit your three fundamentals: consistent profits, measurable growth, and operational independence. If any of these make you uncomfortable, you've found your starting point.

The best time to prepare your business for sale was three years ago. The second best time is today.

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