How to Prepare Your Business for a Profitable Exit: A Guide for Owners

Key Takeaways

When preparing your business for sale, you need to identify whether it’s a cash cow or a dog.
Dogs have low market share and growth, cash cows have high market share but low growth.
The more valuable your business is, the more other people will pay for it.
Preparing to sell your business includes analysing your strengths and weaknesses, improving operational efficiency, optimising financial health, nurturing customer relationships, and establishing strong leadership and management structures.

A typical business owner is what Dan Sullivan describes as a ‘rugged individual’ – someone who doesn’t work well in a highly structured environment and puts a high value on personal initiative and freedom. Someone who is willing to take risks and reap rewards based on results. But people end up owning businesses for lots of reason – some inherit them, some buy them, some start them after being fired or laid off – and lots of people end up wanting to sell them too.

In this article, we’ll talk about the first steps in preparing your business for sale:

how to identify the type of business you have; and
how to attract buyers.

The Growth Share Matrix

The Growth Share Matrix, created by the Boston Consulting Group Matrix and also known as the BCG Matrix, describes businesses (or products or services) according to growth and market share.

Rising stars: high growth and high market share
Cash cows: low growth but high market share
Unknowns: high growth but low market share
Dogs: low growth and low market share

Since its popularisation in the 1970s, the Growth Share Matrix has become a cornerstone in business strategy. And when it comes to preparing your business for sale, it’s crucial to understand what you’re selling: a star, an unknown, a cow… or a dog.

Dogs vs Cows

Applying the concept of the Growth Share Matrix to companies, dogs (low growth/ low share) are in the majority, with cows (low growth/ high share) making up the next biggest group.

Dogs: Low Growth/ Low Share

Dogs are typically characterised by stagnant sales and minimal market influence and are often weighed down by outdated products, inefficient processes, or a lack of competitive edge. A good example would be a small retail shop that has been around for decades but hasn’t made the transition to online markets. With dwindling foot traffic and despite efforts to boost sales, the shop struggles to maintain its customer base and finds it hard to innovate.

Cows: Low Growth/ High Share

Cows are typically stable and profitable, but with limited growth potential. These businesses have a strong market position, often due to a loyal customer base and efficient operations. An example would be a well-established local grocery store that has dominated its neighborhood for years. Despite new competitors, it continues to thrive due to its strong brand presence and customer loyalty.

However, most cash cows eventually become dogs. Inefficient or broken systems, lack of innovation, and new competitors with superior products/ services can all contribute to the decline.

Why Systems Are Important In Business

Michael E Gerber emphasised the importance of systems in business. Most people interpret his approach as working on the business instead of in the business. I don’t agree with this: it’s important to do both. The central message is that systems are the path to freedom.

It is difficult to scale a business without working systems – and it’s impossible to sustain growth without appropriate systems. This is where entrepreneurs typically get caught. They are experts in their trade or profession. They deliver the core products and services the business is built on.

But they aren’t experts in how to run a business. Very often – and crucially – they have no interest in learning. When they employ others to look after those functions, they find it difficult to delegate the right level of authority and end up tangled in the daily admin, or find key decisions being made and executed without proper consideration.

On top of that, implementing systems that determine how the business will run often pushes the owner right up against the reasons they don’t want to work for other people. So they decide that the systems are for everyone else to follow/obey/use – which usually ends in chaos and disaster.

Making a Dog into a Cow: Steps to Enhance Business Value

Regardless of why you’re selling your business, there are several essential steps in preparing your business for sale and finding a buyer willing and able to pay you for the built-in value.

1. Analyse Business and Identify Problems

Evaluate your business’s current performance and market position by analysing sales trends, market share, and competitive standing. Use SWOT analysis to identify strengths, weaknesses, opportunities, and threats. Understanding where you excel and where you fall short will be your guide to improving and preparing your business.

2. Develop your Action Plan

Outline the specific, actionable steps needed to address the problems you’ve identified and determine who is responsible for each step.

3. Improve Operational Efficiency

Identify inefficiencies, streamline processes, reduce waste, and adopt new technologies/ modern equipment to increase productivity and reduce costs.

4. Focus on Finances

Financial health is a critical component of business value and plays an obvious role in preparing your business for sale. Potential buyers will scrutinise your financial statements. Focus on increasing profitability, managing debts, and maintaining a healthy cash flow. Renegotiate with suppliers, reduce overheads, and streamline processes to reduce costs and improve profit margins. This will make your business a lot more appealing to potential buyers.

5. Strengthen Customer Relationships

Strong customer relationships make your business more attractive for obvious reasons. Loyal customers provide a steady revenue stream and are a valuable asset during the sale. Engage with your customers, get feedback, and use it to improve your offerings and boost profits.

6. Build a Strong Leadership Structure

Effective leadership is as crucial in preparing your business for sale as it is in driving successful growth strategies. Having a competent and trustworthy management team will also help achieve a smoother handover and transition process when the time comes.

Choose an Appropriate Exit Strategy

The next part of preparing your business for sale is having a solid exit strategy. It not only enhances your business’s value but also ensures a smooth transition for both you and the new owner. It involves setting clear objectives, timing the sale appropriately, identifying potential buyers, and understanding the legal and tax implications.

Define Your Sale Objectives and Goals

First and foremost, define what you want to achieve from the sale. Are you looking for a complete exit, or do you want to retain some involvement? Setting clear objectives helps you target the right buyers and negotiate better terms. Whether your goal is financial security, a new venture, or retirement, knowing your endgame will guide your decisions throughout the sale process.

Choose a Good Time to Sell

Timing is everything when it comes to selling a business. You want to sell when your business is performing well and market conditions are favorable. This means looking at industry trends, economic indicators, and your business’s performance metrics. Selling at the peak of your business’s success will significantly boost your sale price.

For example, a rapidly-growing tech startup might choose to sell when its products are in high demand and market sentiment is positive – the rising star we talked about earlier. This timing maximizes the potential sale price and attracts more interested buyers.

Identify Potential Buyers

To make the right sale, you need the right buyer. Ask yourself: who would benefit most from owning your business? A competitor looking to expand? An investor looking for a new venture? An entrepreneur passionate about your industry?

Make a list of potential buyers and approach them strategically. Tailor your pitch to highlight how your business aligns with their goals and interests. A well-matched buyer can ensure the continuity of your business’s success post-sale.

Understand Legal and Tax Implications

Make you sure you have a clear understanding of the legal requirements and tax implications involved in selling your business. Get input from legal and financial advisors to deal with contracts, liabilities, and tax obligations.

Final Thoughts for Selling Success

If you want to sell your business at the right time, at a premium on net asset value, you need to start preparing for sale today. The earlier you do, the easier the transformation is. But it’s never too late to start.

Look at your business honestly. If it’s a dog, recognise and accept that. If it’s a cash cow, good for you. But you still need to do the work because the next natural stage after cash cow is dog.

To find a buyer willing and able to pay you for the built-in value of your business, you need to:

Analyse your business and identify strengths and weaknesses.
Make a realistic action plan to implement the necessary changes and improvements.
Tackle operational inefficiencies.
Optimise your financial health.
Nurture customer relationships.
Put strong leadership and management structures in place.

By following these steps and taking market conditions into account, preparing your business for sale will be a whole lot easier and more profitable.

Frequently Asked Questions

Questions? Here are some of the most common ones I get from business owners.

Q: What factors determine if my business is a dog or a cow?

Several factors influence whether your business is categorized as a dog or a cow.

Growth Rate: is your business experiencing rapid growth, or is it stagnant?
Market Share: does your business hold a significant portion of the market?
Profitability: is your business generating consistent profits?
Competitive Position: how does your business compare to competitors?

Q: How can I improve my business’s financial health before selling?

For a complete guide to managing cash flow problems, check out my article on the topic. In short, the main steps involved in improving financial health are:

Minimising expenses: review and reduce unnecessary costs.
Increasing revenue: explore new sales channels and customer segments.
Managing debt: pay down high-interest debts to improve financial stability.
Enhancing cash flow: implement strategies to speed up receivables and manage payables effectively.

Q: When is the best time to sell my business?

The ideal time to sell your business is when it’s performing well and market conditions are favorable. Monitor industry trends, economic indicators, and your business’s performance metrics. Selling at the peak of your business’s success can maximize the sale price.

For example, a tech company might choose to sell when its innovative products are in high demand, and the market is thriving.

Q: What legal aspects should I consider when preparing a business for sale?

Legal considerations include:

Contracts: Review all contracts and agreements for potential liabilities.
Compliance: Ensure your business complies with all relevant regulations and laws.
Intellectual Property: Protect your intellectual property rights and ensure they are transferable.
Taxes: Understand the tax implications of the sale and plan accordingly.

Consulting with legal and financial advisors will help you navigate these complexities and avoid potential pitfalls.

Q: How do I identify potential buyers for my business?

Identifying potential buyers involves:

Market Research: Understand who might benefit from acquiring your business.
Networking: Leverage industry connections to identify interested parties.
Professional Brokers: Consider hiring a business broker to access a broader pool of buyers.
Direct Outreach: Approach potential buyers directly with a tailored pitch.