What is the best time to sell your business? For argument sake, let’s assume you don’t already know the answer and the business you started a decade ago bootstrapped and grew itself into prosperity all by itself…let me pause to holster my sarcasm. In all seriousness, we get this question all the time; and nine times out of ten the owner knows the answer; because they have been thinking about it every day since they started their business.
All business owners contemplate the best time to sell their business. The unfortunate truth is that there is rarely a single moment in the life of a business or its owner(s) that can be clearly identified in the present moment as the best time to sell a business. For starters, our limited ability to predict the future creates difficulty in identifying the highs and lows of current market conditions with any certainty. This inherent difficulty is perhaps why many investment bankers and advisors will suggest to potential clients that “the best time to sell a business…is NOW”.
While it may be difficult to pinpoint the best time to sell, there are certain characteristics many investment bankers and M&A practitioners will analyze in making an informed decision on timing. In general, these characteristics fall into three categories: Condition of the Company, Condition of the Market/Industry and the Owner’s Personal Situation.
Condition of the Company
The financial and operational condition of the company is perhaps one of the most important elements when determining the best time to exit a business. From a value perspective, the optimal time to sell a business is during a period of consistent growth with a supportable forecast of continued growth. As you might expect, however, other factors may impact this timing, particularly for owners who are retiring or experiencing a transition in lifestyle (which tend to stress a business’s growth profile). In general, selling into growth will maximize value to the owner(s).
Other operational and financial considerations:
- Is the company demonstrating improvements in gross profit? Pricing pressure of products/services?
- Does the company have a diverse customer and vendor base? Or is there concentration risk?
- Is working capital being effectively utilized?
- What is the CapEx forecast? Is CapEx focused on growth or replacement/maintenance of aging assets?
- Stability of customer and vendor contracts? Are there circumstances that would preclude a transition certain contracts to the buyer?
- What are expectations of key employees? Are employment agreements in place?
- Are operational procedures documented and followed? Are there improvements to be made?
Condition of the Market/Industry
As you might expect, the best time to sell your business is during a period of strong economic growth. Of course, a good business can be sold in a weak economy; however, valuations are typically depressed as global and national asset prices decline, which doesn’t help business owners who are looking to maximize value. While it is nearly impossible to time the peak of an economic expansion or the trough of a recession, it is ideal to look to current economic indicators to identify optimal and less than optimal times to sell a business.
The industry is equally important to understand. Investors are extremely attuned to struggling industries or sectors that have fallen out of favor. In an ideal world, you would seek to sell your business when industry sentiment is particularly strong and demand is high.
Other market and industry considerations:
- How do the products and services fit into the industry or market?
- Who is the competition? How does the business compare?
- Where are the next logical markets for the business? What steps are being taken to get there?
- How susceptible is the business to new technology?
Owner’s Personal Situation
The owner’s personal situation is a wild card when it comes to determining the best time to sell a business. Personal circumstances can force the sale of a business; while it may be the right time personally (or even the “best” time), the untimely sale may occur during an unfavorable growth stage or less than optimal economic conditions (i.e. owner’s retirement or reluctant transition after a sudden illness tends to stress a business’s growth initiatives). While it may not be feasible to plan for every eventuality, some of these risks can be mitigated by spending time planning how best to address a few key events that routinely cause issues for owners.
Personal factors to have an exit plan for:
- Retirement – Owner has spent a life time developing and growing the business; they are passionate and driven.
- Opportunistic Divestiture – Owner is approached by a strategic (or financial) buyer and considers the approach as an opportunity to de-risk exposure; owners typically develop concerns over value.
- Lifestyle Changes – Owner’s continued involvement and responsibility may lead to fatigue or stress; owner may develop other interests/hobbies or other uses of capital.
- Generational Transition – A clear path to transition ownership may not exist; a death of key person or divorce may accelerate a sale.
- Difficult Market – Some businesses operate in highly competitive environments or stagnate market conditions; owner and/or business may be over leveraged and require capital injection.
- Growth Beyond Willingness or Ability – Small business owners may “lose” control during significant growth and may stress processes beyond the business’ current capabilities and experience.