In 2019 my then fiancé (my now wife) and I decided to pack our lives in Israel and move to the US. At that time, I was fully dedicated to running my business, Meitar Army Gear. We were an e-commerce platform specializing in military goods. My only option was to get ready to sell or close the company since I didn't want to operate it long-distance. I had to decide to sell.

We spent the next 12 months trying to sell the company. 12 hours before I boarded the plane, I succeeded and signed the contract.

The process has taught me five valuable lessons:

1. It doesn't take long for custom systems to turn into debt

Building custom systems was one of my favorite things to do when running my company. The team built the company's e-commerce website from scratch (coded from the ground up), along with the CRM, inventory management system, ERP, and even the POS software for the brick-and-mortar store.

Huge mistake.

At the time, I viewed these systems as assets. They allowed me to provide a grade-A experience and differentiate the company in the marketplace of mediocrity.

All true - so long as someone knows how to maintain and repair those systems. Having built the modules and scripts myself, I didn't spend time documenting them since I built them for myself. No one else understood how these systems were built from the backend. Potential acquirers would eventually encounter considerable problems - and risks are priced when you get a business valuation.

My two options were to sell my web development services with the business (as an hour bank or add-on service) or discount the company's value as the buyer would have to move the company to another, supported system. In the end, I decided to take a price cut and choose the latter. There was no way I would be paid as a developer. While I have the technical skills, building businesses is where I thrive. I don’t accel in the operation of smaller necessary strategic tactics.

Takeaway: Avoid building anything that only you can maintain. Invest in off-the-shelf products, even if they are of lower quality. Having a basic system that everyone can maintain is better than having a custom system that you can only maintain.

As a result of my hyperfocus on systems, I faced one more challenge:

2. Unless you have the right people to operate the systems, they are worthless

In my younger years, I was a control freak. As a business owner, I did not want to hire additional employees and I didn't want to give up profit to pay their salaries. I didn’t trust that anyone could run my business (or help me run my business) as well as I could.

Instead of building people, I built systems. A very sophisticated system that maximizes ME so that almost everything runs without human intervention. I hired low-paid individuals to perform only the most basic tedious, tactical tasks. Things like packing, shipping, and stocking inventory.

There was no doubt that this was another mistake.

Investing my capital in low-ROI labor stifled my business's growth. You can spend $X on someone to pack orders or $3X on someone to help you develop a social media strategy. There is a huge difference in ROI.

Secondly, my business had no one attached to it besides me when I sold it. This is a classic "key man" risk. What happens if a bus hits me? How would anyone operate the more complex systems?

Key takeaway: if you want a premium price, make sure other people can handle your job. Therefore, you can sell the business as self-sustaining.

My first two points are things I should have avoided when running my business. The following are three things I SHOULD have done:

3. Make it a habit to liquidate dead inventory on a quarterly basis

Retail/e-commerce stores, such as mine, purchase inventory in advance, stock it, and sell it later. As in any store, Pareto's 80/20 rule applies here as well: 20% of the inventory generated 80% of the profits. Other 80% of the products were products I felt were necessary to cater to my segment and fulfill my "one-stop-shop" promise.

In the beginning of my exit journey, I wasn't sure whether I could find a buyer for my company. I needed to liquidate my inventory. Everything.

The most popular items sold first, as expected. I only realized how much “long tail” inventory (the other 80%) I was left with once the most popular items were sold. Simply put, it was dead inventory. The items sat on the shelf for over six months.

It's a managerial failure on my part. My first mistake was ordering that inventory in the first place. The second mistake was not getting rid of it much sooner.

Dead inventory = tied up capital.

My money was sitting on the shelf, costing me money and collecting dust.

Immediately, I put into action two tactics:

My first step was to contact my suppliers and ask them to exchange slow inventory for fast inventory. For example, if I had 15 different watch types in stock, I asked my supplier to take them back and sell me only the best-selling model. Since I didn't ask for a refund, most suppliers were willing to exchange goods at face value.

Secondly, I discounted all inventory that I wasn't able to exchange or return. Due to my high margins, I could sell them at cost without losing any money, just opportunity costs. There is no chance to turn a profit at that point. You just need to focus on getting your money back.

I ended up selling 100% of my inventory for a (minimal) profit, but not a loss.

Takeaway: Observe closely the "days of inventory" metric for each item. Liquidate slow-selling inventory quarterly. Focus on 20% of what does sell.

4. Study your successes, not just your failures

During the due diligence process with one potential acquirer, I expected to be integrated across all lines of my P&L, and I had explanations for all revenue dips.

It surprised me when they asked about my best-selling months as well.

There was a huge spike in sales one month. Compared to an average month, it was 3x higher. The potential buyer wanted to know why. Was I inflating sales in order to make the company more attractive? Was there a specific promotion I deployed? Launched a new campaign? What changed?

I learned an important lesson from this: study your successes, not just your failures. Clearly, something happened in that month. To be able to do that thing again and again and again, I must understand what it is.

Key takeaway: Without digging into what works, you won't be able to get it to work consistently - which is a huge loss. Know what works well.

I learned one more thing during my due diligence process:

5. Make sure you know your break-even point, even if you are profitable

During the process of creating financial models around my business, the buyer calculated my breakeven point. I had no idea what that was.

A business' break-even point is simply the amount of revenue it must generate every month to remain profitable. Basically, it answers the question: “what is the minimum amount I need to sell to make a profit?”

The formula is pretty simple and involves overhead and profit margin:

Avg. gross margin (sales/cogs) / fixed monthly expenses = breakeven point.

It costs me $10k to keep the lights on (rent, insurance, marketing, etc.), and my gross margin is 33%. Therefore, just to break even I need to generate $30k in revenue each month.

Businesses with positive net profits often ignore that point, but it's a mistake. To make intelligent business decisions, you must know what your revenue should be in order to turn a profit. Only then can you truly set sales goals and know specific targets.

Key takeaway: don’t wait for a crisis to analyze your breakeven point. Your business should know how much revenue it needs every month to survive.

Putting it all together:

Invest smartly now and reap the rewards later:

When you sell or exit a business, you are forced to get your ducks in order. An external entity grades your company by assigning it an exit multiple. Your exit multiple will be high if you build a strong, self-sustaining machine. Don't make the mistakes I did, or you'll pay for them.

Take your time to make your business more appealing if you're thinking about exiting your business. My business would have fetched a higher multiple had I read Built To Sell two years before selling. Read it. It’s essential to understand the steps to selling a business effectively.

I hope you found this useful. Feel free to contact me if you need help preparing for your exit.

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