Too often, I see owners setting goals based on what they think they can sell their business for once they hit a given target.

But these assumptions are almost always based on today’s market.

The problem here is that no sector stays hot forever.

25 years ago, a plumbing company might have sold for 1-4X earnings. Today, it can sell for about 10X earnings. And in the next 10 years, it could sell for 3X earnings.

That’s just the natural lifecycle of business.

It’s easy to extrapolate based on the market now, but playing the EV game is a tough road with a far more uncertain outcome than you can imagine.

The world may have been up and to the right since 2008, but banking on this being the case forever is risky business.

As you might have gathered by now, I don’t recommend that you focus on EV over everything.

This is for two reasons: timing and overestimation.

Let’s get into it.

The Timing Dilemma

It’s nearly impossible to predict the optimal time to sell your business—and to be 100% prepared when the opportunity strikes.

When it comes to selling into a hot market, you can only control 2 things. The first is being able to recognize a hot market and the second is being ready to sell when you see one.

In theory, this sounds easy.

But the actual timing of a sale depends on a number of factors largely out of your control—including but not limited to the state of the economy, industry trends, geopolitical events, and buyer readiness.

In a good market, you’ll be able to close more easily and fetch a higher valuation. But during a down market, closing a deal gets much harder even if your price is a steal.

If you miss the opportunity to sell at the right time, you may not get that chance back anytime soon.

So not only is timing the market nearly impossible, but your window to do so is also narrower than you might think.

Overestimating Business Valuations

Overestimating what the business is worth is a common mistake I see owners making for one of two reasons. Either they’re unaware of all the factors that could influence the purchase price, or they have unrealistic expectations about the sale process itself.

The best way to avoid both of these pitfalls is to keep the valuation process as rooted in the raw numbers as possible. You should also seek professional advice where needed.

Staying objective and getting professional help will not only save you time, but they will also help you to avoid unnecessary legal costs stemming from lengthy back-and-forths with potential buyers. Getting adequate help as you prepare to sell also ensures that you fetch the highest possible price and are ready to offer a variety of structures to get the deal done.

Aside from directly overestimating the business’s valuation, owners often expect that selling means getting handed a big check and told to go away. Exiting your business rarely, if ever, actually means that you then get to do nothing.

Typically, there’s an earn-out of several years. This usually means working for some of that period while also relying on the new owner’s efforts to a degree. So when you consider the big payout that you’re building toward, factoring this critical detail into the price will not only help you plan your exit, but it will also help you manage expectations on the way out.

I fully expect to sell my business one day, but I plan to get wealthy before that happens.

That way my options are open to timing and structure—including how I get the final payout and when I get to be fully out of it.

I’m managing to do that by creating a business that is not only sellable, but also profitable.

Putting It All Together

Here are your top takeaways from this week’s post.

1. Too often, owners assume that they can sell their business for a certain amount provided that they hit a certain target.

2. The problem with this is twofold. First, this assumes that the market will either be largely the same or up and to the right until the day they sell. Second, overvaluation by owners is pretty common.

3. Selling at the exact right time is nearly impossible, and hot markets don’t last forever.

4. To ensure an accurate valuation, keep calculations as objective as possible and seek outside help whenever possible.

5. Seeking professional help in valuing your business will not only streamline the dealmaking process, but it will also allow you to arrive at a deal structure that maximizes your benefit.

6. Exiting a business is rarely a case of being handed a large check and getting to walk away. There’s typically an earn-out period of several years, during which you often have to work and rely on the new owner’s performance for the full payout.

7. There’s nothing wrong with making sure that your business is sellable. I plan to exit my business one day, too.

8. But building a business with selling as the focus is a fool’s errand. Run it profitably and you’ll get wealthy without having to sell at the exact right time or finding a buyer to agree to your valuation.

Hungry for More?

1. Follow me on Twitter and LinkedIn for daily content to take your business to the next level.

2. Shoot me an email with your questions or requests for what you’d like me to write about next.

‘Til Next Time,

Connor