Achieving Your Freedom to Exit
July 5, 2022
I'll admit that calling the highest level of freedom for a business and its owner "Freedom to Exit" is a bit unconventional.
Why not just call it "maximum freedom" or "peak freedom", since it resides at the top of a pyramid?
The name came to me several years ago when reading a best-selling book about how to prepare your business for sale.
When I finished the book, it dawned on me that businesses that are truly prepared to be sold for top dollar have created greater freedom for the owner; freedom they most likely did not have prior to getting prepared for sale.
It further dawned on me that many if not most owners might choose to remain the owner of their business now that it was operating at a much higher level of performance, and at the same time providing them with a much higher level of personal and professional freedom.
Finally, it became clear to me that when a business is prepared to sell for top dollar, the owner that chose to remain the owner of their business, so long as the business maintained the newly acquired high level of performance, had the “freedom to exit” whenever they wanted to... thus my name for the highest level of freedom for a business and its owner.
Let’s look closer at some of the reasons why an owner would want to exit their business, at options for exiting, then what “selling for top dollar” and “operating at a much higher level of performance” actually looks like, and, lastly, how to get your business to this ideal operating condition... and "freedom to exit".
Exiting Your Business
There are many reasons why an owner of a business might want to exit, but it's often not because they dislike what the business does.
If they did, why would they have started the business in the first place?
All too often, it's because they dislike how the business is operated, causing them burnout, frustration, and sometimes financial challenges, although like my situation, many are actually making good money, and sometimes even great money.
However, when you're constantly faced with operational challenges, pressure from competitors, supply chain issues, employee headaches, and never having enough time to get things done, or time for yourself, even making good money no longer seems worth the never ending struggle, stress and strain.
Under these less than optimal conditions, many business owners at some point eventually decide they’ve had enough, and start looking for a way to exit.
Walk Away or Sell?
Options to exit include closing the doors and walking away, which is often the simplest and quickest way out.
However, if there are any debts and no assets, or not enough assets, to sell, like inventory, equipment, or real estate, closing the doors could cost an owner money out of their pocket to pay off the debts after the doors have been closed.
Most businesses have some value, so closing the doors and walking away would mean leaving money on the table that can be used to settle debts and/or put money in the owner's pocket.
What that "value" is can often be boiled down to a simple formula using a "multiple".
For "Main Street" businesses, i.e. those with an enterprise value under $2 million, the multiple is applied to a "seller's discretionary earnings" (SDE), that is, what an owner puts in their pocket at the end of the day (or year, to be more precise).
According to the Q1 2022 "Market Pulse" Report published by the International Business Brokers Association (IBBA) and M&A Source, multiples of SDE for Main Street businesses range from 2.0 to 2.8.
Applying the multiple formula to a small business with an owner's annual SDE of $250,000 and a multiple of 2.0, the business would be worth $500,000.
However, the chair of the IBBA Market Pulse Committee, Lisa Riley, recently shared with me that while multiples are a great reference, the value of a business is really in the eye of the beholder.
In other words, whatever a buyer is willing to pay and a seller is willing to accept.
This obviously means that some less valuable businesses, in the eye of the buyer, are less desirable and therefore will sell for a multiple of 2.0 or even less.
At the same time, there will be some businesses that are perceived by buyers as more valuable, because they're more desirable, and therefore able to sell for a multiple of 2.8 or much higher.
What makes one business more valuable than another, and therefore more likely to sell, even in a time when it’s harder to sell a business, when it's a “buyer’s market”?
"Elite Companies" Standout
In a recent market update for the "mergers and acquisitions" (M&A) industry, Hagen Rogers of Watermark Advisors predicted that as the United States enters a recessionary environment for the economy, the "sellers market" for business owners that has existed for the past ten years will be coming to an end over the next six to nine months.
Furthermore, "M&A transaction multiples will retreat for all but 'elite companies,'" meaning the valuations of all but the very best companies will be trending lower, and will remain low for some time if his historical example of M&A volume from the 1970's holds true (see chart above).
So what are the characteristics of an "elite company"?
Rogers states that elite companies stand out from other companies because they have the following:
- A great strategy
- Great marketing position
- Great processes
- Great people
- Great financial results
- A great culture
- Great at innovation
- Great momentum
What does it take to build an elite company so that you have the "freedom to exit", even in a tough "buyers market" of mergers and acquisitions?
"Elite" Businesses are Freedom Focused
Not every Freedom Focused business can be considered elite, but every elite business is most definitely Freedom Focused.
Consider the list above, and you see the essential ingredients for Freedom Focused, starting with "great people", which is the objective of the classes in our Dream Team Builder program that help to build a "great culture" based on a crystal clear vision for the future and discovering your business' core values.
A clear vision and core values are the foundation of a powerful hiring process and employee review process that ensure those you add to your team, and keep on your team, are highly aligned, engaged, and motivated to take your business to the elite level, where "Freedom to Exit" is most possible.
The other key elements of Freedom Focused promote "great innovation" and "great momentum" with goal setting, establishing key performance indicators (KPIs), creating a culture of "ownership thinking", and ensuring that every meeting is productive, efficient, and motivating in order to, among other things, spur "great innovation".
Last, but not least, to be Freedom Focused is to have "great processes" which are essential for any business to maximize efficiency and productivity through automation that ultimately creates "great financial results".
Achieving Your Freedom to Exit
If you're searching for greater freedom with less struggle, stress, and strain as a business owner, I hope it's clear now that exiting your business is not the only solution, and likely not even the best solution, for most business owners, and perhaps not for you.
Building a Freedom Focused business will move your level of freedom from Struggle, Competent, or even Excellent, to the highest level of freedom on my hierarchy, Freedom to Exit.
At this level, you can keep your business, which is operating at a very high level of performance, perhaps even as an "elite company", where your personal professional freedom are maximized, and you have the "Freedom to Exit" at any time, when you're ready, on your terms.
You can absolutely do this, just as every business owner can, but only if you stay...
Focused on your freedom!
See Podcast: #028 Freedom to Exit - Guest Interview with Lisa Riley