The risk–reward continuum associated with buying and selling a business works the same way as a see-saw.
On the playground, if an older kid gets on one end, the younger, smaller one shoots to the sky. If two kids are roughly equal in weight, they can have great fun together.
When you sell your business, you want all of your cash up front, putting the risk in the hands of the buyer. When you buy a business, you want to put up as little cash as possible in favour of paying for results in an earn-out—the risk then sits in the hands of the seller. If a potential buyer sees your company as risky, he or she won't want to play. A deal gets done when a compromise is made somewhere in the middle—when both parties strike a balance between risk and reward.
The trick to getting a higher portion of your proceeds up front is to minimize the risk that the business will fade when you leave. Here are seven things you can do to get more of your money up front:
• Get your customers to sign long-term agreements.
• Track your repurchase rate to demonstrate a recurring revenue stream.
• Document your systems for making your product or service.
• Give key employees a long-term incentive plan that ties them to the business after the sale.
• Track your sales pipeline, qualified lead rate and close rate.
• Delegate your personal accountabilities to key managers.
• Write down your secrets for generating qualified leads.
Most acquirers will insist on some form of earn-out or “golden handcuffs.” Your job is to get as much cash up front by reducing their risk—making that see-saw as balanced as possible.
What else have you done to get your company ready to sell? Tell us about it in the comments field below.
Special to the Globe and Mail
John Warrillow is the author of Built To Sell: Turn Your Business Into One You Can Sell . Throughout his career as an entrepreneur, Mr. Warrillow has started and exited four companies. Most recently he transformed Warrillow & Co. from a boutique consultancy into a recurring revenue model subscription business, which he sold to The Corporate Executive Board in 2008. He is the author of Drilling for Gold and in 2008 was recognized by BtoB Magazine's “Who's Who” list as one of America's most influential business-to-business marketers.