Only 8 percent of businesses offered for sale are actually sold in the UK, and that statistic is likely similar for other countries. There are probably three main reasons: 1) some businesses don’t have value; 2) in other situations, there is a wide valuation gap between buyer and seller; 3) often there are risks in a business that a buyer is unwilling to assume.

A privately held business is perhaps the most illiquid form of investment. It may take many months, even years, to sell a company.

So how can one best maximize the chances of a successful sale? I would suggest paying attention to the following five areas:

1. Know thyself. Does the business owner really want to sell? Particularly for those business owners facing retirement, there is often deep psychological resistance to selling a business. Giving up travel, an expense account and a life with a mission can be difficult, especially if moving to retirement. Some owners may get to the final phase of a negotiation, get cold feet, and suddenly withdraw, without fully understanding the reasons themselves. Bottom line: business owners need to understand their own motivations, and when exiting to retire, need to plan and prepare themselves for the subsequent phase in their lives.

2. Understand your objectives. Is the objective to maximize transaction revenues? Or reaching a predefined minimum price? Speed of a transaction? Looking after future family generations? Often objectives can be contradictory: maximizing speed, for example, tends to reduce price. It helps to have a written definition of objectives. Few things focus the mind like putting objectives in writing. Then set a plan for achieving your objectives.

3. Build scale and profitability. Most people intuitively understand that the more profitable a business, the easier it is to sell. But it is perhaps counter-intuitive to learn that selling a $10-$20 million business is actually easier to sell than a $1-$2 million business. Larger businesses typically have more critical mass, better systems, better staffing and governance. Hence there are typically more potential buyers for larger businesses. A small business often does not “move the needle” for many buyers.

4. Build the business from the perspective of an investor. Every now and then, a business owner should be like a fly on the wall, and assess his or her own business objectively, from the perspective of an investor. (Or ask an objective outsider to do it.) Is this a business that would be desirable for investors? Which investors? How much would the business be worth?

I once advised a business owner that every dollar generated in his fledgling online business generated eight times as much value as in his conventional business. He immediately postponed any plans for sale, and decided to work for a few years on building up his online business.

Sometimes I find businesses that are involved in too many incompatible business lines, hence not of interest to any buyer. (For example, one of my clients had businesses in construction, aviation-related manufacturing, and non-core assets.) Such companies generally require restructuring prior to sale.

Both of the above situations illustrate how a business should be built from the perspective of investors. There is often a paradigm shift involved when business owners who build a business in their own image realizes the need to build a business that will survive, most often via a sale, and hence be of interest to investors. Neglecting this rule can result in a business that is illiquid or unsaleable.

5. Begin exit planning as early as possible. I am often asked when the best time to begin planning an exit is. My answer: when you consider buying or founding a business. It’s never too early. Too many business owners spend decades building a business without planning for exit. It’s then often too late to do estate planning or tax planning, let alone applying all of the principles mentioned in this article. A fundamental reason for the success of the private equity industry is that they take a very hard look at exit before investing in a business. You need also to take time to build your team, both internal staff and external advisors (lawyer, accountant, financial advisor) that will assist you with the transaction.

Think of building and selling a business not as two separate acts, but as part of the same continuum – in the same way that mountain climbers, when planning an expedition, plan not just for the ascent, but also for the descent. A business should be built with exit, or at least succession, in mind.  

Retirement for a business owner can be like going from full speed to full stop from one day to the next. Some business owners get cold feet when they are selling their businesses and withdraw from or even sabotage a transaction because they cannot come to terms with retirement. As with most things, the two principles of “know thyself” and “plan for tomorrow” can go a long way towards making the transition to retirement a success.

Know thyself

None of us are immortal and, alas, the human body diminishes in capacity over time. This makes it important to develop a realistic forecast of how much longer your body can take the vigorous pace of business life. Has your body slowed down over the last five years? Count on it slowing down at a somewhat faster pace over the next five years. Have you been for a full physical examination lately? What are your health risks? How old are you? Are you still able to work long hours, focus and concentrate as much as you need to? Is your motivation as strong as it was? Can you see yourself running your business three years, five years, or ten years down the road? Answering these questions honestly will help you plan for the transition to retirement much more successfully.

Also, it is worth remembering that retirement is considered an excellent motive for selling a business, one that any investor can understand: if a business owner waits too long and illness or incapacitation becomes the motivation for sale, then investors will typically sense the distress and drive a much harder bargain.

Some owners have pursued their businesses with such singular focus, that they have neglected other interests, and hence have trouble contemplating any transition. For these owners, the “know thyself” principle is all the more important in developing those activities that could be pursued outside work. Children or grandchildren? Consulting? A few board positions? Charity? Social life? Travel? These are all potentially valuable things you can pursue after you have sold your business and play a key part in our other key principle.

Plan for tomorrow

Planning future activities can help prevent that feeling of going from full speed to full stop. Pre-sell a book title to a publisher. Plan that round the world trip you have always wanted. Would you want to reactivate some of your old hobbies or start a new one? Take up golf or a musical instrument? Or start attending Rotary meetings? Check out if these are things you could imagine spending more time on. There are many facets to you, and life beyond your business is a chance to explore these, but planning is the only way to ensure you will successfully be able to do this.

You should also make plans for a time when it might be necessary to exit the business, as well as for an orderly transition. Do you want to take time to enhance the value of the business in order to optimize value before selling? Remember that the sale might not be successful at the first attempt, perhaps due to changes in market conditions or simply if your first negotiations with an investor do not produce anything solid, for whatever reason. Most business owners who have never completed a transaction underestimate the complexity and duration of the process to sell their businesses. It generally takes between one and three years to prepare the business for sale and complete the transaction, and then another few years of activity for an orderly transfer to the new owners, in order to truly maximize business value.

During the planning process, remember that shareholders’ strategies seldom perfectly coalesce with those of a business. For example, a shareholder may want to begin taking more money out of a business just when a business might be demanding ever more capital. Make sure that both elements of the strategy or planning are taken into account. Remember, there are many alternatives to selling your business, ranging from selling a minority interest to raise capital, passing the business on to the next generation or to its managers or selling to minority shareholders. The costs, benefits, and risks of each option should be analyzed in light of the shareholder and corporate strategies.

For most business owners, selling their company is the most important business decision of a lifetime. Most business owners have an imprudently high percentage of their net worth tied up in their business and therefore the successful sale of the business will need to fund a comfortable and rewarding retirement, as well as possibly also providing for the next generation.