Ep. 24 - Why Does Exiting A Business Take So Long?

Are you planning to exit your business? How long will it take to exit? Well, you better get your headphones on, and we will dive right into today’s conversation with Dr. David Gruder and his co-host, Jason Tuzinkewich. They navigate the big picture of selling a business, speeding up the process of exiting and maximizing your odds when buying a business. We don’t want our business to consume our lives, so let’s understand the business gaps and pivot away from that to maximize your business value when selling. Learn to establish a sellable business with Dr. David and Jason today!

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Why Does Exiting A Business Take So Long?

...And What You Can Do to Reduce How Long Your Exit Takes

In this episode, we are going to provide you with something that, as far as we know, you won't find elsewhere, which is the big picture, a coherent framework around what's involved in selling your business and why it usually takes far longer than it should. We're going to be covering how you can speed up the process of selling your business and, at the same time as speeding it up, overcome the horrible statistics that only 10% of exits are achieved through a sale and only 1% of exits have terms that are truly beneficial to the seller.

If you are a business buyer, you're going to want to read this episode as well because you are going to see what's involved in preparing a business that you might want to buy because finding businesses that have done the work we're about to describe can help you overcome the 82% post-acquisition failure rate. We'll start with, what the devil takes so long?

I'm getting older already.

The first reason that things take long is that filling the personal wealth gap you have, the gap between how much you can and want to exit with, is part of why it takes so long. The necessity here is being able to live the life you desire after you exit.

That's such a big deal because if you don't know how much it costs, you can't plan for that cost. To piggyback on that, for most small and medium-sized business owners, 80% to 90% of their personal wealth is living inside of the business. As a big part of filling that personal wealth gap, business owners need to start filling the gap between what they think their business is worth and what it's currently worth in the marketplace.

That’s important because most owners think their business is worth a lot more than it is. Occasionally, some owners think it's worth a lot less than it is.

I met my first business owner who had an opinion of his business's value that was less than what the market would bear, but then he promptly hopped on his unicorn and rode home. Understanding where your business is worth is the first step to getting it to where you want or need it to be before you can exit. Those two things go hand in glove.

The third reason it takes so long is when you don't know and do something about all the critical planning elements that need to be addressed before you can take your business to market.

There's a lot of them. None of them can happen overnight. I'm glad that you bring that up. Finally, understanding what a good buyer looks like for your business and the legacy that you want to have, and then finding that type of buyer who's ready to buy, pay you the price that you're looking for, and then working through the specific elements from finding that buyer to the closing table is frequently an arduous process as well.

Those are the four reasons why it takes so long and what we're going to unpack with that is what you're going to tell us next.

Let's take those four things. Let's talk about how long these things typically take to fix so that we can get a real picture of, “Why does it take so long? How long is it?” Let's talk about, at the exact same time, normally, we do all the challenges, then we do a success roadmap, and then we walk through our key takeaways. We're going to hit you with everything all at once. We're going to tell you what the issues are and the timing, and then we're also going to talk through the mitigating measures and what you can be doing to improve that. The big thing here is that everything you can do with your business is a time-saving measure and exit is also helping to create a more valuable business, ensuring a more successful exit. We're going to focus on the time aspect here, but the quality aspect is as important.

Everything you can do with your business that is a time-saving measure in exit is also helping to create a more valuable business which ensures a more successful exit.

Read carefully because we're going to be describing for you how you can shorten at least somewhat the amount that it takes to sell your business. Unpacking the first element that we described is the personal wealth gap. A common trap is deciding how much you want your company to sell for before you have determined how much money you will need to live the life you want to live after the exit. That's backward.

It's like a novice financial planner who isn't very seasoned saying in an initial conversation with a prospective client, “How much money do you want to retire with?” That's an important question, but that question's way out of sequence if it's the first question. The first question is, “What's your ideal calendar lifestyle and legacy? What is that going to cost because that's what's going to tell you how much money you want to retire with?” Not some arbitrary pie in the sky, “I want to retire with X amount of money.” That's backward.

With that financial advisor, “What are you going to do with my money?” That's going to change it too.

This is why defining your life after exit is critical to determining how much money you're going to want to sell your business for and that it takes a while. Unless they knew to do this ahead of time, which is what we're encouraging you to do if they haven't figured this out ahead of time, figuring this out can take as much as three years. Even if it takes you less than that, filling that gap, figuring out how to fill the gap between how much your business can be sold for versus how much you need your business to be sold for in order for you to live your ideal lifestyle, calendar and legacy, that could take three years or more.

I can't impress strongly enough on how hard that process is. We talk to business owners and we say, “What are you going to do after you exit?” “ I'm going to golf. I like golf.” I'm like, “That'll keep you happy for three months. What are you going to do when golfing gets old?” “I'll go fishing.” “That's another month.” We're talking about years of your life here. Figuring out, “What can I do that will get me out of bed with a smile on my face and a balance of my steps for the next ten years?” That's hard to wrap your brain around when, for the last many plus years, your life has been consumed by getting up and running your business.

Of all of the things that I do with businesses, among the most exciting and juicing for me is helping owners craft their next life chapter so that they're juiced about entering it and that they're not going to unconsciously sabotage the exit process because they're looking so much forward to a very specific, clear, exciting, and livening plan for their next life chapter.

That's a big deal. This goes back to the statistics you were talking about earlier. 85% to 90% of transactions that fail in due diligence do so because the owner consciously or subconsciously recognizes that they can't let go of their business. Having something to go to that's exciting is huge, and it's critical to closing a good transaction. More than that, when you define your life after exit, the cost profile of that lifestyle is going to be dramatically different. No matter what it is, it's going to be dramatically different than the cost profile of your lifestyle as a business owner. You can't look at your current and historical cost of living to determine what you're going to need in the future. Another big mistake that people make is, “I live on $200,000 a year and I'm comfortable. I won't need more.”

Understanding and wrapping your head around that and defining where is your personal wealth gap and where you need to be is the best possible precursor to what I want to talk about, which is the business value gap. The whole reason that we built our business the way that we did is because the first few years I was in mergers and acquisitions, I would meet business owners who were ready to sell.

They were ready to sell up here, but nothing else was ready to sell. I saw a lot of M&A transaction advisors taking those businesses to market and either having the business transaction blow up in due diligence, sell at a discount that the seller wasn't happy with, or sell at a reasonable price and have the buyer holding a bag of goods that didn't give them the return that they were expecting on their investment.

Understanding the business value gap is the first place to say, “Here's where we're at. Now, how do we get up here?” that often takes a long time. Even if the fixes that will improve your business value are easy, even if you’ve got a poor cost of goods because you’re carrying too much inventory and you’re suffering waste with raw product on the shelf, and if you fix your inventory practices, your cost of goods goes down and your profitability improves, that’s super straightforward.

It's easy to say. It's even relatively easy to fix, but you're not going to get value for that fix until you have three years of financial track record showing that margin is durable. Even the easiest thing I could think of off the top of my head as far as a fix to improve business value is going to take three years to prove out.

Most businesses don't have those easy fixes because business owners, by and large, are pretty smart operators. It's the sneaky stuff that needs to be fixed to mitigate risk so that they can get value. Some of the things that need to be done in order to facilitate this, but also to get to accurate business value and track consistent financial performance is getting your financials audited. 1) That is paying for an expert extra set of eyes to comb through the details of your financial reporting to make sure that nothing's missed.

2) That is handing a buyer a third-party approved set of financials that they don't have to pay extra money to bring in a forensic accountant to do a quality of earnings on because somebody's already done that work. It speeds up that due diligence time. It gives you the most accurate assessment of where your business is so that you know exactly what can and should be fixed, and it will improve your value because there's less risk in third-party forensically approved financials.

Documented systems. When a business owner is the key center of knowledge for how things get done and that business owner wants to leave, you can't leave for two years until you train a couple of other people to have that knowledge. If the business owner and the entire team are documenting what they do so that anybody can come in, get trained by somebody who understands the process and have a documented handbook to refer back to if they get confused and turn out consistent product quality, now it's a lot easier for that business owner to leave, then making sure there's consistency. If you want to sell your business with this story of capacity for growth and a market that desires your product enough that you can grow, then you're going to have to have a few years of consistent growth to support that story.

If you want to sell your business with this story of capacity for growth and a market that desires your product enough that you can grow, you will have to have a few years of consistent growth to support that story.

Nobody's going to pay you the maximum value on a hockey stick. They're going to pay you maximum value on a steady trajectory. You need years to show that steady trend and then understand where you are compared to your business peers within the industry. A lot of business owners focus so much on being perfect inside their walls that they forget that there’s a whole industry out there that they're competing against.

Although you as a business owner are exceptional at many things, if you don't know where the bar is, you'll probably get to a point where you're optimizing the heck out of something you're already crushing to the detriment of something where you've got a lot of opportunity to improve. Understanding where you fit against your industry peers in key performance indicators and making sure that you are operating at or above those industry peer benchmarks in all cases is going to give you better cashflow, a more durable and robust business and a competitive edge as you are working in your business.

When it comes time to sell, you're placing yourself in the upper quartile of your peers who may also be looking to sell. All of these things, you can see how these are relatively straightforward conceptually, but every single one of these elements is going to take probably 1 to 2 years to perfect and then another 3 years to provide that historical record of perfection. When we talk about closing the business value gap, we're talking about a five-year investment in time many times. If you are a business owner who, in your head, is ready to leave, how are you going to drive excellence for another five years?

It’s important that what you're doing is you're breaking the don't talk rules in the industry and exposing what needs to be handled. In this journey through the four big challenges with why it takes so long and solutions that can shorten the time it takes, the personal wealth gap is about, “Are you ready to sell?” The 2nd business value gap is about, “Is your business ready to sell?” The 3rd gap is the readiness gap, which is, “Is your business ready to buy?”

I want to emphasize that being ready to sell is not identical to being ready to be bought. They're both crucial. They're not identical. In the exit readiness gap, the thing that needs to be paid attention to first is your silent partner. What you are fond of asking people is, “Who's your silent partner?” The business owner doesn't have any obvious silent partners. They'll usually say, “I don't have any,” to which you are brilliant in responding, “You do have a silent partner. It's the government. It's the amount of money that the government is going to bite out of your sale. How are you going to do tax mitigation? How are you going to incorporate that tax bite into how much you need to sell the business in order to be able to live your ideal calendar lifestyle and legacy?”

That's such a big deal because if you think about it on its surface, the government has 40% equity of your exit. That's where they start. We want to get them down to 10% or less of your equity so that the value you built in your business is going into your life after exit. There are a lot of things that can be done in this area. All of them take time. This is a big one that a lot of people think about. A lot of business owners I talk to think about the tax implications of the sale for the very first time when they're executing the letter of intent and there's no time to do anything at that point.

That's part of the exit readiness gap. Another dimension in the exit readiness gap is succession leadership transfer. How are you going to ensure that your business is going to continue to flourish under new ownership? How are you handling your succession planning? How are you going about discovering who wants to stay in your business after it's sold? Who wants to leave and with those who want to stay? Help them become indispensable so that it's going to be clear to a competent new owner. All you want is a competent new owner. Otherwise, they'll destroy your business after they purchase it.

Making sure that the people stay on with the business are viewed as indispensable to the new owner and make sure that whoever is going to leave the business, the new owner is not caught holding the bag, but where there is a plan for succession so that those missing roles are going to be filled in a good way. This goes back to what you were saying about documented systems. If the people who are leaving haven't documented what they do, why they do it, how they do it, etc. If they haven't documented that in a detailed way, they haven't documented that to the level of detail that's necessary so someone new who comes into that position can have a good solid running start from day one. That's another dimension of the exit readiness gap that needs to be filled.

I want to jump in here because this is another one that's hard for the normal entrepreneur and business owner to deal with. The key to a great transfer of control and succession plan is making everybody on your team indispensable while making yourself superfluous. It's hard for a person who's driven hard, led the team and built this business from the ground up to say, “Now I'm going to shift gears and go from being the critical heart of this organization to being an extra character so that when we sell, I can go and retire.” It takes time to wrap your brain and your ego around that way of thinking as a business owner and leader, but it's valuable and terribly important.

Also, under the business value gap, the exit readiness gap is about proper market positioning. Where do you fit? What does your business provide that makes it the only or is it what you're providing that's the only version of that in the marketplace? Do you have a specialized version of what you're providing that's the only version for a specific niche or subset of the overall marketplace that they wouldn't want any other version because your version is custom-made for a subset of your marketplace?

Proper market positioning is another key gap to fill in exit readiness. The next gap is what we referred to earlier as well, which is the next life chapter crafting. If you haven't crafted that next life chapter for yourself in the ways we talked about before, you are going to unconsciously undermine exit preparation and the actual exit process.

You're going to do it despite the part of you that wants to sell without a compelling next life chapter that you are juiced about entering into. You are clear enough about the specifics so that you know what you're juiced about. You have an exit readiness gap. This exit readiness gap fills all of the parts of this exit readiness gap.

It's not uncommon for that to take around two years because think about the amount of time it takes to decide who is part of the succession plan and to groom them so that they're ready to fill the roles that they're going to be filling as you make yourself more superfluous. It also is going to take time to make sure that all of the systems documentation is in place so that those who won't be around after the business is sold are not creating gaps that are going to prevent the business from continuing to flourish. This can take at least two years.

Everything we've been talking about so far is in the scale of years. This is what we mean by it takes so long to sell a business because of all of those years we've talked about so far and we haven't even begun part four, which is the implementation of a sale. All of this work, we've been years and years here, getting ready to have a business that can be sold, to have a business that buyers find attractive, to have a plan for your life after ownership.

Now, you can take a breath and say, “We're ready to start selling now.” The last thing we're going to talk about here is the sales process implementation. Any investment banker, business broker, or M&A transaction advisor that you will meet will all tell you, “It's a marathon, not a sprint, but they're meeting you at the last stage of the marathon.”

I think of this more as a triathlon than a marathon. Once you finally start the sales process, what goes into that? It takes a couple of months to develop all of the marketing materials. You'll hear people talk about a Confidential Information Memorandum or the book, which is what potential buyers who execute a confidentiality agreement get access to determine if this is a business they're interested in and what range of values they would place on this business.

There's a lot of information that has to go into that. There are disclosures and financials. There's all of this stuff, culture, history, markets. Everything has to be disclosed in this document in order for buyers to determine, “Is this a business I'm interested in?” It takes a while to write that. You have to have a teaser or something that is a pre-confidentiality agreement that you can go out and promote the business with.

You have to create a list of targeted buyers, people who not only could buy your business, but you have a compelling reason why they should buy your business. You have to identify these people. You have to call them, interest them in executing a confidentiality agreement, get them to read the book, answer all their questions, and push them into the process of negotiating an offer. It takes months to wrangle these cats on fire because, especially if you're going to be a strategic buyer, you are going to be talking to an executive of a business that is running and their attention is going to be focused 98% on keeping their business running and 2% on maybe buying your business. There's a lot there.

When you're talking about private equity groups, it's not any better. Their sole focus is buying businesses, but they look at 100 to 200 businesses a year to buy 1. You have to make yourself stand out in this crowd. You have to get their attention long enough to get them to be interested and fall in love with your business and give you a good price. Once you've done the negotiation, you have a letter of intent, you've chosen one buyer that you want to get married to and then there's a due diligence process.

The due diligence process is bankers. You got to get financing in a high-interest down economy. You're going to have bankers that are very stingy with their money. They're going to take a long time to get convinced to approve a loan. You've got potentially a quality of earnings report, which is the forensic audit of your financials that we talked about earlier, that can be mitigated or sped up at the very least with audited financials. Also, with audited financials and a great track record of growth that speeds up the bank's process because they see you as less risky and then you've got the legal piece.

I love lawyers. They charge $50 to print a piece of paper that they can read because they won't read off their computer screen, but it takes time to print those pieces of paper and they'll charge you for the fifteen minutes it took to print, but they're laborious. They work by the hour and are solely responsible for protecting you from risk.

The negotiating of the definitive agreement is a long drawn out process because you've got yourself and your advisors trying to get you maximum value while you've got a lawyer that's trying to get you minimum risk that you've got to try to get this all in a document that the buyer is trying to do the exact opposite with.

All of these things take time. If you've already done the steps that we talked about previously, then you've mitigated a lot of risks, which means there's less for the lawyers on either side to worry about. You've got clean records, which is easier for a forensic accountant to go through. You've got a great strong, growing business that is easier for a bank to get behind, and you've got a transition plan that makes everybody feel more comfortable with this transition. All of a sudden, we can take that due diligence process and speed it up a little. With all of that, I'm kicking it back to you.

Let me do a quick summary that leads up to the final part of what we're going to say before we move on to takeaways, which is to think about what's involved in making sure you, as the owner, are ready to sell. What's involved in making sure your business is ready to sell? What's involved in making sure your business is ready to buy and is attractive to the right seller? The bad news is that if you haven't been proactive in dealing with these gaps all along the way, this entire process can take as long as eight years.

Before you get completely overwhelmed by that timeframe, if you take to heart what we've covered in this episode, you can reduce that amount of time to as little as twelve months if you've done these things all along through your business lifecycle journey, then getting through all of this can take as little as 12 months in contrast to 8 years.

The time it takes is dependent on how small or large these four gaps are in your business at this current time and how personally ready you are to sell. Take heart. There are ways to reduce how long it takes to sell your business, but only if you know what's needed and you are doing what's needed proactively so that by the time you get to the point where it's time to sell the business, you're not going to be spinning your wheels, pulling your hair out, feeling frustrated and feeling blindsided by everything you didn't know to do beforehand.

If you're at all like me, you've got to protect every strand of hair you have because it's a diminishing commodity. That was a lot. We've given a little bit of a fire hose on this one, but I think it's important stuff. It's something that we can reinforce with business owners and with advisors as we continue with this show. Let's wrap this all up. I'm going to start with my big takeaway and then I'd love to know what yours is.

For me, the biggest takeaway is we gave you four different gaps within a business and your personal life that will need to be closed and that takes a good amount of time to close before you can exit successfully. My big takeaway is 3 out of 4 of those, your personal wealth gap, business value gap, and exit readiness gap, all of those are things you can be working on right now. You don't have to be looking for an exit to be working on these things to be aware of, to start thinking about what you want your life after ownership to look like and how much that's going to cost, to start looking at what your business is worth and how to boost that value to get it where you want it to be and understand how attractive your business is and how much equity your silent partner has in your business how do you improve those things.

Those are all things that you could be working on so that when you decide up here that you're ready to exit, you can also look around your business and personal landscape and say, “Out there, it's ready to exit too. Let's go.” the last thing that I want to say about this is like we said in the beginning, not only are we talking about reducing the time to exit your business when you choose that is where you want to go. These are things that improve the value of your business. It improves the cashflow of your business. It improves the durability of your business in troubling times and the adaptability of your business in changing markets. Even if you're 50 years away from wanting to leave your business, doing this stuff now is beneficial to you as the owner of an investment instead of an operation.

Even if you're 50 years away from wanting to leave your business, preparing your business today benefits the owner of an investment instead of an operation.

Blue Sky Business Resources is designed to attend all of these gaps in an integrated, comprehensive way. That's part of what excites me about being affiliated with Blue Sky Business Resources. The fourth gap, the sales process, takeaway here is that the sales process goes a lot more quickly when you have the first three elements that Jason reviewed, locked, and loaded.

You can cut the timeframe for the sales process by as much as half, from 18 months to 9 months, let's say, if you've got everything lined up that needs to be lined up in order for your business to be attractive to the right seller. The final takeaway with that in mind is the time to start is now, not tomorrow, next month or next year, because doing that is what's going to be the remedy that saves you time in reducing the amount of time it takes to exit your business.

I'm going to do a shameless plug for the show because I realize there's something that we didn't give enough attention to during this entire session that I want to point out, which is it takes a village to get this done. It takes not only an extraordinary operating team and leadership team within your business but an exceptional and diverse advisory team.

It takes an extraordinary operating team, a leadership team within your business, and an exceptional and diverse advisory team to increase the value of your business.

These different elements require different skillsets from your advisors. My last thing is, if you're new to the show, we did a three-part series called The Teams You Need a while back. This goes into great detail about those advisory teams. If you're interested in this, you want to get going and don't know where to start, feel free to call us at any time, but also, check out the three-part series The Teams You'll Need and get a little more insight into how that goes.

With that said, thank you so much for reading this episode. We have a lot of fun making these. We get excited about the content as we craft it. We hope it's as meaningful to you as it is to us. We always invite you to click the subscribe button on whatever platform you're checking us out on so that you can be notified immediately when we release future episodes.

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