Did you know you can sell your business twice? The secret to financial freedom before the exit.
Most Entrepreneurs and Business Owners are focused on that one big sale event. It is the ultimate dream: Start a business, work hard, grow it, and ultimately make a sale leading to financial freedom.
But what if I told you that you don't have to wait for an external buyer? Did you know that you can actually sell your business to yourself first, and then sell it again to someone else?
The Bad Deal That Taught Me Everything
I learned this vital lesson about halfway through my journey as a business owner, operating a digital agency called meltmedia. I was little over 10 years into what became a 20+ year journey. At this stage, I had a solid medium-sized business with around $8 million in revenue and was consistently operating at a 15% EBITDA.
I had met the CEO of a larger creative agency, and after building a relationship, he offered to buy us. At first, I was really excited. I thought this was a great market opportunity and a nice way to take some money off the table for all my hard work.
On paper, the top-line number for the offer looked good, but as I got into the details, things made me uncomfortable quickly. Here are the items I flagged:
The EBITDA multiple and thus the business valuation was too low.
The deal was a mix of a small amount of cash upfront, equity in their business, and a three-year earn-out structure with a large payout only at the end of Year 3.
Cash upfront was only 25% of the selling price.
I quickly realized the risk/reward scenario of this sale was heavily skewed: very little risk for them, and quite a bit of risk for me, with little immediate reward.
They were only giving me 25% of the value of the business upfront in cash, and some of that money was coming from the cash we already had in the business. I was effectively giving up control for minimal immediate cash.
The earn-out payments were minimal—less each year than I was already making from my profits. The substantial payout was years away.
I was getting equity in another private company that I had no control over, and there was no clear exit strategy for their company.
This deal was pretty much dead on arrival. But studying the structure of their offer taught me a valuable lesson. Over the three years of the earn-out, they were essentially using my company’s cash flow to pay me and their initial capital outlay. I was basically paying for my own sale.
How Private Equity Pays for Acquisitions
This realization opened my mind to a concept I had never considered: You can sell your business twice.
When other companies or Private Equity firms buy a business, they are looking to get their money back and grow their investment, typically within a 3-5 year window, using various strategies:
Cash Flow: Using the business’s own cash flow to pay off the acquisition debt.
Synergy: Rolling up the company into a greater structure so the entire new entity is worth more than the sum of its parts, and allowing cross sales from the larger entity.
Multiples: Paying a lower multiple (e.g., 5X profit) and rolling it into a larger, more strategic business so they can get paid a higher multiple (e.g., 10X profit) for the entire entity.
Cost & Operational Improvements: Lowering costs and optimizing operations to make the business more valuable or improve cash flow and multiples.
Why You Should "Buy" Your Own Business
As a business owner, you are technically an employee if you work in the business (even as CEO), but in most cases, you are also the main shareholder and investor. As an investor, shouldn’t you be able to do the same thing for yourself that a Private Equity firm would do? While not all strategies apply, the cash flow strategy works every time.
Here is the mindset shift:
The Employee Part: The part of you acting as CEO or whatever role you play should be taking a market rate salary. This is your living wage.
The Investor/Shareholder Part: This part of you should take the profits (distributions) and use them to fund your own "sale."
Once I had the proper operating capital to run the business, I started flowing distributions out to fund my personal “sale number” or my “retirement” goal. I had a low end and a high end to what I called my financial “freedom” number. Pick one solid marker—a sale target or retirement goal—and then figure out how to “sell your business” to yourself using that target number. Then, if things worked out well (which they did for me), you sell to someone else, effectively selling twice.
This Was a Game Changer
This empowering financial moment taught me:
You control your exit: As a business owner, we think we only have one exit, but we don’t.
Goals are attainable now: I could accomplish my financial goals while still working in the business. The eventual sale became a bonus, not an end game.
No more waiting: I could map out my exit strategy and not even worry about having to sell.
This made financial freedom attainable now. Something I was building each year versus waiting for some undetermined date until I sold. It also set me down a path toward a profitable external sale.
In order for me to “sell my business to myself,” I had to ensure it was always “saleable.” This forced me to do the hard work to get ready for a sale, even though I wasn't selling. This made the business inherently more valuable each year, and it paid off immensely when I actually sold to someone (more on that in a future blog share).
Your Three-Step Plan to Sell to Yourself
There are some basic non-negotiables before you can go down this road:
Stabilize Operations and Capital: Initiate this plan after the start-up stage has settled and you have the appropriate operating capital to sustain the business. Identify the correct operating capital for your industry and keep it in the business so you are stable. You should also have your business at a solid EBITDA in the 10%-20% range (Note: This strategy may not work if you are venture capital-funded or have many investors, as this creates complexity and a different exit strategy).
Pay a Market Wage Salary: Pay yourself a market wage salary that you can live on. Many business owners keep a low salary and look towards both the salary and distributions to live on. If you do this, you are cheating yourself. For a saleable business, a President or CEO needs to make a market wage, or you are simply lowering your business's value.
Build a Distribution Schedule: Build a distribution schedule to move profits out of the business into some type of investment plan. Fund that plan at least once a quarter, assuming your operating capital is solid, and execute your plan against your “sale number” or "retirement goal.”
Stop Making Excuses: This Works
I know as you read this, you are excited about what I just shared, but I also hear a few of you doubting this will work or saying, “well, this won’t work in my business because I have XYZ going on.”
I’m going to call Bullshit.
This works in every business past the start-up stage. If you can’t do this, it means you have some critical adjustments to make in your business structure. Who is going to buy you and give you financial freedom if you can’t do it for yourself? No one, or at least not for the number you have in your head. I am not trying to be critical; I am trying to help you realize that this is doable, and it is doable now. Go do it.
One of the biggest obstacles as entrepreneurs is getting out of our own way. Part of making this work is removing those limiting beliefs, trusting in yourself, and figuring out how to make this abundance flow.
If you are already in a position to do this, congrats—maybe this awareness will help you formalize your plan and realize you have financial freedom right now. If you can’t start this tomorrow, that’s okay. This is not some elusive target; it is closer than you think.
Next Steps:
In order to help people understand the financial flows of all this, I have put together an app for you to run your own scenarios and a default case study. In my follow up blog post, I analyze how to use the “Cash Flow Exit Strategy” to sell your business twice and illustrate how powerful this strategy is no matter the size of business.
