It is an age-old question for business owners: “Is now the right time to sell my business?” Because the economy has been fairly strong the past four to five years…and just seven years ago we went through the worst financial crisis in 80 years, many business owners are naturally concerned about trying to “time the market” for the sale of their business. This question, “Is now the time to sell my business,” is one I get asked almost daily by our clients and prospects. In this issue, we look at the factors around the timing decision.
Let’s face an incontrovertible fact: along with death and taxes, one thing is certain, every business, at some point, will change ownership. Said ownership change may occur after your demise (as the business owner) and it may not be an outright “sale.” But no matter what you do, you cannot change nature. We are all mortal which means our businesses will change hands, like it or not.
Since a change of ownership of your business is inevitable, one aspect of the process you can control is when the transfer of ownership occurs. If you plan to sell your business, how do you know the right time to sell? Unfortunately, there is no written formula, no handbook, no magic hourglass whose exhaustion of sand lets you know it is time to sell. Thankfully, there are several factors which help influence your decision.
Unfortunately, most business owners tend to base their decision to sell on a hot (or cold) economy. We have seen too many owners wait to sell until after the market has peaked, only to have a very unsuccessful or unsatisfactory process. Back in 2007 and 2008, we had several clients who wanted to wait to “time the market” and sell at the highest point. They missed the peak and were forced to continue running their business through the recession and beyond. Trying to capture the “last dollar” cost them millions.
What are the factors influencing your decision to sell? There are internal and external factors, and some beyond your control.
We consider internal factors as “controllable factors.” These are issues over which the business owner has control and input.
The most importance internal factor is the desire or motivation to sell. An old mentor of mine used to say “the most critical component for a successful business sale is a motivated seller.”
The decision to sell a business is never easy for the business owner. This decision is purely internal; it is one which only the owner(s) can make. If the owner(s) want to sell, the Company will be sold; conversely, if the owner(s) do not want to sell, regardless of price, the business will not be sold.
The second internal factor is the health of the owner and or his/her family. Too often, we get a call from owners who are interested in selling because either they or a loved one has been diagnosed with a debilitating or terminal illness. “I want to sell so I have time to do the things I’ve always wanted to do,” or, “I don’t want to spend my last years working,” are common themes we hear from our clients.
A third internal factor is the health of the company/business. Many business owners believe, incorrectly, they can sell their way out of trouble. That is, if the company is not doing well financially or operationally, magically, a buyer will swoop in and solve all of their problems. Unfortunately, life is not a fairy tale.
Regarding the “health” of your business, ask yourself the following questions: Is your company financially sound? Are you at a point where you need to invest significant capital for new equipment to maintain the business? Do you need to make significant investments in marketing programs or to expand your territory simply to maintain the business? Do you need to have a number of key employees getting ready to retire, all of whom you will need to replace? Has your company been growing in terms of sales/revenues and profits each year, or have you been stagnant, or…worse…seeing a decline in revenues and profits? The answers to these questions may help you determine if now is the best time to sell your business.
A fourth internal factor is the growth of the company. Sellers want to sell when they have wrung every last dollar out of their growth curve. However, buyers want to buy when there is still some “squeeze left in the juice.”
One saying we have in our business, which is an absolute, is: “One year of growth is an accident, two years are a trend.” Imagine this scenario: you have five years in a row of flat/even revenues and earnings. Then, last year, your sales increased 20% from the prior year. Sellers want buyers to believe their increased sales are the “new norm.” Buyers want sellers to “prove” the new norm by doing it more than once. Thus, the best time to sell is not necessarily after your one great year, but after two good or great years.
The final controllable factor is product/service viability. If you want to sell your business, you do not necessarily want to be the last man standing. Several years ago, we were working with two clients who were in the data/disc duplication business. Unfortunately, they waited too long to consider a sale; by the time they wanted to sell, the market had moved and people were downloading files directly from the internet and no longer needed floppy disc’s or CDs. The idea here is to get out while you still have something to sell.
External factors are generally out of your control as a business owner. What are these external factors?
The first external, uncontrollable factor is the state of your industry. Even during recessions and depressions, some businesses do quite well. During 2010, while the overall economy was bad around the world, certain parts of the agricultural economy in the USA were as strong as they have ever been. In that year, we closed several transactions in the agricultural sector for prices/values which were above market. Even in bad economies, good businesses in healthy industries get sold for good prices.
The second external factor is, not surprisingly, the health of your local and national economy. It is true “rising tides float all boats.” In economic boom-times, M&A deals tend to get done more easily and for more money. In lean times, deals get more difficult.
Another external factor is the health of the financial market. If banks/lenders have money and are willing to lend for reasonable rates with reasonable collateral requirements, deals get done. But if interest rates are high and/or collateral requirements increase, not only do deal valuations decrease, but it is hard to get deals done with buyers who use leverage (borrowed money) to complete their transactions. In 2009, even though interest rates were at historic lows, banks were not lending because of their high collateral requirements for loans.
A fourth external factor is governmental regulations. You have no control over changes to tax codes or operational regulations required by your local, state or federal government. We saw a huge demand to sell businesses in 2012 before long-term capital gains rates were set to increase. Similarly, we saw a significant increase in business owners looking to sell gas/service stations in 1999 before new underground storage tank rules were set to go into effect.
The final external factor is technology. Technological changes or advances make yesterday’s equipment and services seemingly less valuable virtually overnight. You cannot control your OEM’s product developments; if they don’t move as quickly as the “other guys” or don’t advance their technology lock-step with the industry, you and your company may face significant challenges to revenue and earnings growth.
HOW TO CONTROL THE FACTORS
With so many controllable and uncontrollable factors, how can you know when it is the right time to sell? The most important thing you can do as a business owner is prepare for the inevitable. You know at some point you will have to transfer ownership of the business. If you can accept this as inevitable, you can start planning for it.
At the end of the day, the absolute best time to sell a business is whenever you are ready to commit yourself 100 percent to the process of selling and when you and your company are healthy enough to sell.
I am happy to answer any of your questions regarding this subject or any previous articles. In my next article, I’ll discuss the subject: The Top 10 Signs It Is Time to Sell?