Exiting is a goal for most DTC brand founders. But is your business actually prepared to sell for top dollar? Learn several tips for getting ahead on preparing for an exit. Believe me, you’ll thank me later.
I’ve had several clients over the last few months ask me for advice on preparing their businesses to sell. Today I’m going to walk you through several things to think about when preparing for an exit.
Start Preparing Now
The worst time to start preparing for an exit is when you’ve decided to start the selling process. The most successful, highest-valued exits take place after years of preparation. Stephen Covey’s 7 Habits of Highly Effective People famously states, “Begin with the end in mind.”
The essence of this first tip is simple – if a potential exit is in your strategic plan, then you should start running your business today with this end in mind, even if you don’t expect it to happen for several years. The result will be a much more seamless sales process and the highest valuation possible.
Prepare Your Business to Run Without You
No buyer wants to acquire a business that can’t run without its founder(s). If you want to command the highest price possible, you need to structure your business to run without you. Now - I must warn you - this takes a great deal of time and discipline. It’s one of the reasons why my first tip was “start preparing now.”
How do you build a business that can run without you? You need to put a business operating system in place, a structured set of processes and systems that govern how a business operates. I personally use EOS (the Entrepreneurial Operating System). In a nutshell, EOS provides a framework for structuring your business around 6 core components:
- Vision – define where you are going and what you stand for.
- People – define your process for putting the right people in the right seats.
- Data – define what key metrics you track to assess performance.
- Issues – define how you solve business issues and make them go away forever.
- Traction – define what meeting cadences the business runs on.
- Process – define how you document your core processes and get them followed by all.
If you want to learn more about EOS, I suggest reading the book Traction by Gino Wickman, EOS’s founder.
Build a Business That Generates Profit and Cash Flow
The reality is that buyers are in the business of acquiring assets that generate cash flow. You can’t generate cash flow without profitability, so the profit and cash flow generating potential of your business is essential to your exit valuation. To underscore this further, any savvy buyer will base their purchase price on the present value of the business’s forecasted future cash flows.
The moral of the story is this – if you want to exit for top dollar, then focus meticulously on growing a business that generates above-average profitability and cash flow.
One side note on this topic – I personally believe that during heavy growth phases, it can be challenging for a consumer brand to optimize profitability and cash flow while also optimizing growth. And that’s okay. Just make sure that you’ve built a margin, overhead cost, and cash conversion cycle structure that - when growth does slow down - your buyer can leverage to harvest big time profits and cash flow.
Build a Business with Sticky Customers
If you’ve already done the hard work to build a customer base of raving fans who repeatedly purchase from your brand, you’ll be able to command a much higher valuation from a potential acquirer. Building sticky customers takes hard work and dedication. It’s a long process of refining your product catalog, marketing strategy, and customer service over many, many years. The good news is this - buyers are willing to pay extra to have this hard work already done for them.
Another reason this is so attractive to buyers is because, brands with high repeat purchase and customer lifetime value figures tend to have much lower marketing costs - and in turn higher margins - than brands with lower rates of these metrics. Why? Because selling more products to an already-existing customer is significantly cheaper than acquiring new, first-time customers. Potential acquirers absolutely love this, as it is a major driver of sustainable profitability and cash flow.
And remember – acquirers are in the business of purchasing businesses with above average profitability and cash flow generating potential!
In conclusion, if you are a DTC brand founder with a goal to exit your business for top dollar, it is crucial to start preparing for it well in advance.
Key preparation steps you should take are:
- Structure your business to run without you.
- Build a business that generates above-average profitability and cash flow.
- Build a customer base of raving fans that purchase from you repeatedly.
If the thought of preparing for an exit amidst all your other founder responsibilities overwhelms you, and you don’t have a CFO on your team, consider hiring a Fractional CFO to help.
At Free to Grow CFO we give founders of growing DTC brands the Executive-Level CFO advice and expertise they need to scale alongside healthy profit, cash flow, and personal confidence.
And – preparing your brand for an exit is one of our specialties.
Book an intro call today if you’re ready to learn more about how we can help you successfully navigate your scaling journey.
Until next time, scale on!