Ep # 68 - Business Exit Mastery: Avoid Pitfalls & Maximize Value with David C Barnett - Part 1
David Barnett joins Joe to share valuable insights on the common pitfalls business owners face when preparing to retire and sell their businesses.
Discover the key areas to focus on for enhancing business value, from reducing customer concentration risks to navigating the challenges of owner dependence.
Whether you're a business owner weighing retirement, or an entrepreneur interested in the art of business sales, this episode provides expert advice to ensure a smooth transition and a fulfilling retirement life after being your own boss.
What You’ll Learn in Today’s Episode
Correct Pricing is Crucial: The most significant mistake business owners make when selling their business is mispricing it. It’s important to understand the realistic market value of the business. Overpricing can deter informed buyers, while underpricing may lead to undervaluing the business.
Focus on Cash Flow: Beyond revenue, it's essential for business owners to prioritize cash flow. Cash flow determines the value of the business. Buyers not only assess current cash flow but also consider whether it will continue under their stewardship. Understanding this buyer perspective allows sellers to address risks like customer concentration, owner dependence, or reliance on specific suppliers that might affect future cash flow.
Consider Terms of Sale: Recognizing that businesses are rarely sold on a cash basis, it’s important to understand and negotiate realistic terms of sale. Sellers need to be aware that buyers might require financing, and terms could involve receiving a percentage on closing day and the rest over time. Managing expectations and being open to flexible terms can make the business more attractive to potential buyers.
Bottom Line Growth: While increasing revenue is often the focus, business owners should prioritize bottom-line growth. It's not just about selling more; it's about improving efficiency, managing costs, and ensuring that profits contribute significantly to the bottom line.
Mitigate Risks and Maintain the Business: Sellers should address potential risks and maintain the business as if it might not sell immediately. Even with a good offer, the deal might not close, and businesses should be operated under the assumption that it may not sell. Proactive risk management, regular equipment replacement, and maintaining customer service standards contribute to the business's attractiveness in the market.
Ideas Worth Sharing
· "Selling a business is like selling a work of art. When you decide to sell your business, you're entering into a marketplace where informed buyers are looking for a business like yours."
· "Getting an offer on your business that's a good offer is like winning the lottery. Closing the deal and getting paid is like winning the lottery again the following month."
· "The most lucrative exit from a business is not a change of ownership; it's just you going out the door. If you can pull it off, that's the most lucrative exit."
· "Cash flow is what determines the price of the business. You look at the cash flow; this determines what the business might be worth."
· "Bottom line growth is what you should be focusing on because the cash flow is what determines the price of the business."
Resources in Today’s Episode
Retirement Planning Simplified
www.DavidCBarnett.com – David’s Blog
David C Barnett Small Business and Deal Making SME – David’s Youtube
Small Business & Deal Making Podcast – David’s Podcast
Ep # 34 – YRPS – Retirement for Business Owners with Bob Gauvreau
Ep # 50 – YRPS – Managing Taxes: Strategies for Business Owners
Enhancing Business Value: Selling your Business, Planning your Retirement
with David Barnett and Joe Curry
“Getting an offer on your business that's good is like winning the lottery. Closing the deal and getting paid is like winning the lottery again the following month.” - David Barnett
If you’re a business owner feeling frustrated and overwhelmed by the lack of interest from potential buyers, you are not alone.
Despite your best efforts to market and promote your business, you may find that the offers you receive are far below your expectations. Instead of seeing the business value grow, you may be experiencing a decline in interest and a sense of uncertainty about your retirement plans.
In this podcast, David Barnett, a seasoned expert in the field of business sales, brings over two decades of experience in working with small businesses and helping individuals buy and sell them. His wealth of knowledge, acquired since the 90s, provides invaluable insights into maximizing the value of businesses for retirement planning. David's expertise lies in guiding business owners through the intricate process of selling a business, enlightening them on the common mistakes to avoid, and offering invaluable advice on preparing a business for sale. His extensive experience and practical wisdom make him a valuable resource for business owners looking to transition into retirement by selling their businesses.
In this episode, you will be able to:
· Maximize your retirement funds by selling a business.
· Understand the key factors influencing your business's value.
· Learn how to enhance business value through effective maintenance.
· Gain insights into managing your business for a potential sale.
· Discover the importance of cash flow in determining your business's valuation.
Mistake in Selling a Business
Selling a business is an intricate process that requires careful planning and understanding of the market. We can compare it to selling a tangible asset like art or property. Selling a business is about convincing potential buyers about the profitability and growth it promises. It's a complex transaction where several factors like market demand, competition, and economic conditions play a significant role. It requires a different valuation approach.
Importance of Cash Flow
While revenue is a critical metric in any business, when it comes to selling a business, cash flow is king. Future cash flow is often the primary consideration for potential buyers assessing a business. This is because cash flow is the lifeblood of a business, providing funding for operations, growth, and returns for investors. Buying a business is like buying a house, if you have a damaged roof or an outdated furnace, it’s like having outdated equipment in a business. It will negatively impact the value.
Enhancing Business Value
Enhancing business value requires implementing effective systems and procedures, mitigating risks, and addressing dependencies. Not only does this improve operations and profitability, but it also makes the business more attractive to potential buyers. A smoothly run business holds a greater appeal to buyers and commands a premium price. Finally, effectively dealing with owner dependence and managing vendor concentration can go a long way in enhancing the value and attractiveness of a business.
The resources mentioned in this episode are:
· Visit DavidCBarnett.com to access the blog site with valuable information, videos, and resources on buying, selling, financing, and managing small and medium-sized businesses.
· Subscribe to David Barnett's YouTube channel for over 600 free videos on small business topics, including buying, selling, financing, and managing businesses.
· Stay tuned for Part 2 featuring David Barnett on January 11, 2024 as he shares more insights and expertise on exiting from a business.
Timestamped summary of this episode:
00:00:00 - Introduction and Background
Joseph Curry welcomes David Barnett to the show and discusses the focus on retirement planning and entrepreneurship. David shares his experience in working with small businesses and helping people buy and sell them since 2008.
00:03:18 - Mistake in Selling a Business
David explains the biggest mistake business owners make when selling their business - assuming that selling a business is like selling a work of art. He emphasizes the importance of understanding the realistic price and terms of sale.
00:07:31 - Perspective of the Buyer
David talks about the buyer's perspective when purchasing a business, focusing on the cash flow and the continuity of cash flow under the new ownership. He highlights the importance of factors like documented systems, risk, and reliance on key individuals.
00:11:49 - Focus on Revenue vs. Cash Flow
The discussion shifts to the mismatch of focusing on revenue instead of cash flow. David emphasizes the importance of bottom line growth and making decisions based on the time horizon for selling the business. He advises on the impact of growth on overheads and bottom line profits.
00:13:37 - Importance of Cash Flow
David emphasizes that cash flow, not revenue, determines the value of a business.
00:14:30 - Enhancing Business Value
David discusses how factors like customer concentration and equipment maintenance can drive additional value for a business.
00:16:00 - Challenges of Selling a Business
David highlights the difficulty of selling a business and the importance of maintaining profitability, even if the sale doesn't go through.
00:17:53 - Lucrative Exit Strategies
David shares that the most lucrative exit from a business is not a change of ownership, but rather being able to delegate and manage the business remotely, allowing for continued ownership and profit.
00:19:29 - How to Connect with David
David shares where listeners can find more of his content, including his blog, YouTube channel, and podcast, all focused on buying, selling, financing, and managing small and medium-sized businesses.