We’ve all met the “lucky” entrepreneur. You know the one; that business owner who breaks the rules, or ignores them completely, and succeeds despite bad decisions and visible shortcomings. Sometimes it’s obvious what their stroke of luck was — great timing, great location, not-so-great competition. Other times you scratch your head and wonder how the heck they’ve done so well.
Regardless of your level of success, simply surviving as a small-business owner appears to have some luck involved. Just look at the odds associated with startup success:
- More than 50% of small businesses fail in the first four years
- Of all small businesses started in 2011:
- 4% made it to the second year
- 3% made it to the third year
- 9% made it to the fourth year
- 3% made it to the fifth year
Most of us who have sold a business, or work with selling owners, will tell you that the only thing harder than starting a business may be selling one (or successfully exiting via any method). The statistic most often associated with selling a business is daunting: Roughly 20% of businesses that go to market actually sell.
There’s a bit more data around family business exits. Often referred to as the “backbone of the American economy,” family-owned businesses appear frail when it comes to succession and exits. Case in point is the 30-13-3 rule:
- 30% of family-owned businesses survive the transition from the 1st generation to the 2nd
- 13% survive the transition from the 2nd generation to the 3rd
- <3% survive beyond the 3rd generation
Whether you’re a professional gambler or something akin to it, like a small-business owner, the question of luck versus skill quickly comes into play. The primary reasons for startup failure never change. Perennial list-toppers include: no market need, insufficient cash, and incompetent management. Likewise, the main reasons businesses fail to sell always include: unrealistic seller expectations (particularly around valuation), poor financial records, and selling at the wrong time (i.e. when the business/industry is in decline).
Is there some amount of luck involved in successfully selling your business? There can be. But let’s consider the main characteristics of sellable businesses and successful sales, then rate them on a scale of 1 (no luck involved) to 10 (lucky break).
In this post we’ll start with the things that take the least amount of luck.
Setting expectations around valuation and the selling process
Luck factor: 1
There are a number of stubborn myths about selling your business. After more than a decade of working with selling owners, I’d have to say that thinking you can sell whenever you’re ready — with little to no planning or preparation — is the most pernicious.
When it comes to valuation, many owners think they know what their business is worth — or get stuck on a number that satisfies their own financial goals — without understanding how buyers value a business or what the market will support.
It’s easy to tip the scales in your favor on this one. Simply engage with a business broker, business valuation specialist or M&A advisor well in advance of wanting to sell. These advisors are often brought into the mix when it’s too late for them to make a big difference. Call them in early, get clear on your goals and expectations, then get to work on a plan.
Strength & clarity of financial statements
Luck factor: 1
This is a critical piece of not only getting your business sold, but also ensuring a strong valuation and a smooth due diligence process. This takes zero luck. What it does take is a commitment to keeping the books with a potential buyer in mind.
The quickest and most cost-effective way to get your books in shape for a sale is to get a business valuation. Going through the valuation process will uncover the strengths and weaknesses of your financial statements. It will also give you clear direction on what needs to be tidied up or requires more attention prior to a sale.
(Bonus: A valuation is a great tool for overall business planning, regardless or when or if you plan to sell.)
Luck factor: 2
Buyers don’t want to buy the owner, they want to buy the business. There are many reasons why a business revolves around the owner, including the owner’s ego, inability to delegate, or reluctance to hire a solid layer of upper management.
Whatever the reason, this tends to be one of the toughest mindset changes for business owners to embrace. In the owner’s view, ceding control of daily operations seems like a risk. In a buyer’s mind, a good management team is an asset while the owner is viewed as a potential risk.
Ask yourself the following question: Are you building a sellable business, or a job? Determine your answer, then set expectations accordingly for a future sale.
Luck factor: 3
A bit of luck doesn’t hurt when it comes to the topline revenue of your business. An extreme weather event can provide a nice bump in sales if you own a towing business or a roofing company. Better yet, you may pick up some long-term accounts when a competitor folds or a customer opens a new location nearby.
Lucky breaks aside, buyers look for businesses with several years of profitability and consistent financial performance. That means having the discipline to keep a close eye on the key metrics in both your business and your industry: Gross margin, net margin, percentages like rent and wages to sales. Are you watching EBITDA growth and EBITDA margin? These metrics may have missed your radar, yet they are extremely important to buyers.
Sellable businesses show consistent financial performance, with numbers tracking in the right direction. Do you know what metrics matter most to a potential buyer of your business? If you’re focused on the wrong thing — like minimizing taxable net income — you’re most likely hurting both the value of your business as well as the odds of selling it.
Low customer concentration
Luck factor: 3
Your business just landed a huge customer. What luck! Right?
Maybe. It depends on how that one, big account affects the overall customer concentration of your business. In general, buyers don’t like to see more than 10% of sales come from any one customer, or more than 30% come from two.
While customer concentration fluctuates, make sure this number stays low. If you win that big account go ahead and celebrate. Then look at what needs to be done, like hiring some sales folks to bring in new business, to keep customer concentration from getting too high.
There’s no denying that having the winds of fortune blow in your favor can be a great thing for your business. Yet successfully selling your business — something few business owners achieve — really is an area where luck favors the prepared.
Don’t leave selling your business to chance. Get started on a plan…today!