The Company Worth Selling Is the One Worth Running

Ask a CEO about succession planning and the answer usually comes with a date attached. They'll get to it when retirement is a few years out, when a buyer calls, or when the next generation decides whether it wants the business. Until then, there's a company to run.

I understand that instinct, and I think it has the order backwards. The hallmarks of a company that sells easily and for the highest value are the same hallmarks of a strong company at any stage, which is why I treat succession planning as a business-building decision. The work that prepares a company for its next owner also makes it a better company for the owner it has today.

Think about a homeowner getting ready to sell. The realtor walks through and says to spruce up the landscaping and paint all the rooms, and the owner scrambles to finish work that should have been done years ago. Founders often approach a sale the same way, and by then the things a buyer values most can't be rushed.

What a buyer is paying for

A buyer is paying for a strong cash machine that keeps running after you leave, one the owner is less than 10 or 20 percent involved in. Revenue and profit are part of that picture, but they don't answer the question a buyer cares about most, which is whether the cash will still be there next year and the year after. The stronger the whole business system behind that cash, the stronger the multiple and the easier the sale.

Several things have to be true for that system to hold up, and they depend on each other. The company needs clarity about where it's going, with a vision and purpose the whole team can describe the same way. It needs a defensible strategy that makes it the only choice for its best customers, which is what produces a bank of loyal customers who come back and refer others. It needs a culture that keeps committed A players around, and a leadership team that actually leads, runs the business, and understands it from customer to cash.

It also needs proof. Buyers want to see at least three years of documented success working a strategic plan, with strong cash flow to show for it, and three-year cash flow projections that give them a roadmap for what happens after they own it. All of this rests on a company playbook, the strong processes for how you recruit, onboard, retain, and reward people, and for how the rest of the company runs. If you never sold, you'd still want every item on that list.

How much of the business still depends on you?

A company can be growing, profitable, and well regarded and still have most of its value sitting in one person. I have no problem with a founder being involved. A CEO who sets strategy, builds leaders, and serves as the company's ambassador is doing the job. The problem is dependence, where the business can't function, grow, or endure without the owner in the middle of it.

The yardstick I use with CEOs is that you should be less than 10 or 20 percent involved in running the business. That's my own benchmark rather than an industry statistic, and it gives you a place to start. Look at your daily and weekly activities and ask yourself a few questions.

• How much of your time goes to working in the business, compared to working on it?

• How many hours are you working, and are you there before everyone else and after everyone leaves?

• Are you the lead salesperson or the lead operations person?

• How many questions do you answer in a day, and can your people make day-to-day decisions without you?

• How many of the company's initiatives are you personally heading up?

Honest answers often point to the CEO Doom Loop, where the pressure of growth pulls a CEO back into jobs they left years ago. That pattern is hard on a company in any year, and it matters even more at a sale, because a business built around one person gives a buyer less to buy.

My friend Carl Saunders, former CEO of Vorum, shows what the other side looks like. Carl had done very little in his company for the two years before he sold it. His buyers told him they normally want founders to stay two to three years on an earn-out. They could see his company ran without him, so they only needed him for six months.

Why buyers follow the cash

My friend Alan Miltz, co-founder of Cash Flow Story, has a line for this: revenue is vanity, profit is sanity, cash is king. A company can report strong revenue and a healthy profit and still have its money sitting in receivables. Buyers want to know the company produces cash today and will keep producing it after they own it. As my friend Greg Crabtree likes to say, if the cow is producing milk, why kill it for one barbecue?

That cash comes from the whole business working together, which is why I pay so much attention to the customer-to-cash cycle. Marketing understands who your ideal core customer is, where they are, and how to reach them, then generates leads that get qualified and handed to sales. Sales takes the right clients through a strong process, wins them at a premium without compromising on price, sets the right expectations, and collects the information operations needs. Operations delivers on time, on spec, safely, and at the gross margin you planned. Finance collects quickly, keeps receivables low, and makes sure the company stays cash forward, with clear accounting so everyone can see the score.

A weak link anywhere in that chain ends up in the bank account. If sales compromise on price, gross margin pays for it, and if finance can't collect, the company falls behind. Those handoffs between functions are where execution tends to break as a company grows.

Start with the weakest leg of the table

Start with the weakest part of the business. My advice is to look at each function and review how well it's working. How good are the metrics that measure its output? How is it performing against them? How strong is the leader of that team, and how strong are the people in it? Whichever one comes up weakest is where you go first.

I describe a business as a table. In the Apex North Star Way, powered by Metronomics, we work with seven connected systems, which are Strategy, Execution, Cash, Human, Cohesive, Cultural, and Coach Cascade, and each one is a leg holding up that table. Bump one leg up too far or too quickly and the table tips, and everything on it slides off.

So the work goes one leg at a time. You assess where the weaknesses and strengths are, shore up one area, move to the next, and keep working your way around the table. It takes years, which is the best argument for starting now. Buyers want three documented years, and you can't produce those in the months before a sale.

What comes after the sale

Everything so far has been about the company. The founder needs the same preparation, and I would argue it should be the first thing a founder thinks about in a sale, ahead of how much money they'll make. It rarely works out that way. Sale time comes, the founder is busy painting all the rooms, and nowhere near enough time goes to working out what their new purpose will be.

My colleague Bruce Eckfeldt, a fellow Metronomics coach, wrote Springboard on exactly this subject. He says roughly three in four founders experience regret within a year, and the cause is rarely the price.

Plenty of founders assume they'll have millions, life will be great, and they'll be happy. Then at some point after the exit they wake up and don't know who they are, why they're there, or what they should do that day. One founder sold his company, and about six months later he was talking to me about how he could get back into business. "Glen," he said, "I love golf, but I can only play golf so many days of the week."

I don't tell that story to talk anyone out of selling. He had the sale behind him and no answer to what he was going to do next, and that question is much better worked out before the deal than after it.

Build something that can outlast you

When I build a strategic plan with a leadership team, I encourage them to set a big, hairy, audacious goal, to use Jim Collins' term, that sits 10, 20, or 30 years out. I often hear that the CEO won't be around that long, or wants to exit in five years. I encourage those CEOs to think of themselves as the steward of a legacy for the time it's in their hands, and to aim beyond the point where they plan to leave.

A CEO working toward one defining date tends to run it like a sprint, going all out, getting tired, and giving up at the end. Building leaders year after year is closer to a marathon. Simon Sinek makes a similar case in The Infinite Game, where he argues that business has no finish line and the goal is to stay in the game. A company that can stay in business for a long, long time is a company someone is going to value. The ones that depend on one individual many times cease to exist, or get acquired and folded into someone else's operation.

The same is true of that house. A place with a crumbling foundation and an overgrown landscape may only be worth the value of the land, because the buyer plans to scrape it and build something new. Our house is about 100 years old, and a house that age that has been scrupulously maintained and updated feels brand new. People can move right in and feel comfortable, and a house like that sells faster and for a lot more money.

A sale is one possible outcome of building a strong company, and you may never choose it. Either way, the people who work for you and the customers who count on you are better off in a company that can run without you. That's the work we do with CEOs at Apex North, helping them build the clarity, alignment, and accountability that make a company strong enough to stand on its own. If you want a place to start, The CEO Playbook came out of our interviews with 72 CEOs about why capable leaders get stuck as their companies grow.

Whether you sell in five years or never, the company is in your hands for now, and the useful thing to ask yourself is what a new owner would find if they walked through it tomorrow.

FAQS

When should a CEO start succession planning? Long before an exit is in sight. Buyers want at least three years of documented success working a strategic plan, and that record can't be produced in the months before a sale.

What makes a business transferable to a new owner? A transferable business keeps producing cash after the owner leaves. It has a strong culture, committed A players, a defensible strategy, loyal customers, a leadership team that runs the company, and documented processes in a company playbook.

How can a CEO tell if a company depends too much on them? Look at your daily and weekly activities. My own benchmark is that an owner should be less than 10 or 20 percent involved in running the business. Warning signs include being the lead salesperson or lead operations person, answering most of the questions, and personally heading up most of the initiatives.

Why do buyers care more about cash than revenue? Buyers want confidence that the company will keep generating cash after they own it. As Alan Miltz of Cash Flow Story puts it, revenue is vanity, profit is sanity, cash is king.

What should a founder plan for besides the sale? A founder should work out their new purpose before the deal closes. I've seen founders exit and find they don't know what to do with their days, and Bruce Eckfeldt covers this in his book Springboard.