Most everyone who knows me, knows me as a “baseball guy”. I often say that everything in life can be explained with a baseball analogy. Hyperbole? Sure, but not by much!
Every summer, as Major League Baseball's trade deadline approaches, teams begin making difficult decisions. Contenders look for the final pieces that might help them win a championship. Other teams decide which players may be more valuable to someone else than they are to the current organization. Rumors circulate, offers are exchanged, and longtime players suddenly find themselves wearing another uniform.
Having spent much of my life around baseball, I have always found the trade deadline fascinating. It also reminds me of something business owners sometimes struggle to accept: The market does not value something based on what it has meant to you. It values it based on what it believes that asset can produce going forward.
A player may be loved by the fans and he may have even delivered some of the greatest moments in franchise history. But when another team considers acquiring him, the questions are different. What can he contribute now? How healthy and consistent is he? How well will he fit into our organization? Can he help us win after he becomes ours?
As the saying goes, past performance is no guarantee of future results.
Buyers ask remarkably similar questions about a business. Owners understandably see their companies through the lens of the past. They remember when money was tight, the customers who took a chance on them, the employees who helped build the company and the personal sacrifices required to keep it alive. Those experiences matter and should be a source of tremendous pride.
Unfortunately, a buyer cannot purchase the owner's memories, effort or sacrifice. The buyer is purchasing future cash flow and accepting the risk associated with producing it. Buyers want to know whether earnings are reliable and growing, whether customers will remain and the leadership team can run the company without its founder. They look for recurring revenue, diversified customers, documented processes, dependable financial information and capable management.
They also look for anything that makes future performance less predictable. Is too much revenue tied to one customer? Are important relationships dependent upon the owner? Does critical knowledge live inside one person's head? Just as a team discounts a player's value because of injuries or inconsistent performance, a buyer discounts a business when it carries risks that may not become fully visible until after the transaction.
This is where valuation conversations can become difficult. An owner may say, "I have spent 30 years building this company." A buyer may quietly think, "But what will happen during the first 30 months after you leave?" Neither perspective is wrong. They are simply measuring two different things. The owner is measuring what it took to build the business and the buyer is measuring how much of that value will transfer.
That distinction is central to exit planning. A company can be profitable, respected and enormously important to its owner while still being overly dependent upon that owner. Some businesses are successful precisely because the owner maintains the key relationships, approves every major decision, solves the toughest problems and keeps the organization moving.
That may produce strong income today. But it does not necessarily produce maximum transferable value tomorrow. Buyers do not want to acquire a business and then discover that its most valuable asset walked out the door at closing.
Fortunately, there is an important difference between the trade deadline and the sale of a privately held business. A player rarely controls when he will be traded or which team will acquire him, but a business owner who begins planning early has considerably more control.
You can strengthen the leadership team, reduce customer concentration, create more predictable revenue and document processes that depend upon experience and institutional knowledge. You can transfer important relationships to other team members. You can also determine what you want from an exit financially, personally and professionally before someone else places an offer in front of you.
These improvements do more than prepare the business for a sale. They create a healthier company today and give the owner more freedom along the way. That is why exit planning should not begin when the owner is ready to sell. By then, the metaphorical trade deadline may already be approaching, with too little time to correct issues that could reduce value or limit the owner's choices.
The best baseball trades work because the acquiring team can clearly see how the player fits into its future. The best business exits work much the same way. A buyer must be able to see how the company will continue serving customers, retaining employees, generating cash flow and growing after ownership changes.
The real question is not simply, "How successful has this business been with me?" It is, "How successful can this business remain without me?" That can be an uncomfortable question for an owner who has spent decades being the company's most valuable player. But answering it honestly is often the beginning of building a more valuable business and a more confident exit.
Buyers do not pay you for the business you built. They pay you for the business they believe will remain after you leave.
You may not be approaching your own trade deadline today. But the work you do now will help determine how many choices you have and how much value you can preserve when that day arrives. Exit planning is not simply about preparing to sell. It is about building a business that gives you the freedom to decide when, how and whether you leave.
If you are beginning to consider what your business might look like without you or whether its value is as transferable as you believe a thoughtful exit-planning conversation can be a good place to start.