When is the right time to Sell my Business? When Everything is Going Great.
Timing is critical when planning an exit strategy and there are several factors to consider.
In our 20+ years of assisting business owners in planning their exit, ‘when is the right time to sell?’ is a question we hear all the time. But from a business owner’s standpoint, this could be tricky to predict. Is it when you are nearing retirement age? Or is it when you have found a good person to step into your shoes? While these are important factors to consider when getting ready to sell, the most important components to selling your business are its current financial state and the market atmosphere. In other words, you want to sell your business when everything is going great. Through most of our interactions with business owners, we have learned that this concept feels counter-intuitive. If your business is doing well and growing, you may think that if you wait a little longer, you can get even more for your business when it starts to really take off. Unfortunately, that thinking has landed many of sellers we know in a very regrettable place.
The first step in determining the right time to sell your business is analyzing the market atmosphere, which is all part of the suggestion that you want to sell when things are going great. For example, buyers are scarce during tough economic times because it can be hard to secure the necessary funds and people are less likely to take risks when the economy is unstable. But when the economy is flourishing, sellers have an advantage due to an increased interest in entrepreneurship and easier access to capital. If you think you may be getting close to exploring your exit options, the following are signs of a healthy economy that should align with your M&A sales timeline.
Predictors of a Good Economy for Selling a Business:
Local Economy: Take the time to analyze your local economy to see if there is actually demand for a business like yours. Is your city growing? Are more people moving in? What is the state of small and big business in your metro area? These are all questions to ask when thinking about selling your business. Statistics show that on average, 42 people move to Charlotte every day which shows that our city is growing with people seeking opportunities. Other factors to explore include recession recoverability, cost of living, state taxes, and local workforce.
Market Conditions: Market conditions are important because they tell us how the economy is doing and what the forecast looks like. Selling during a recession might be a bad idea; selling out of desperation usually results in a lower sales price and fewer buyers to choose from. You will want to position your M&A transaction for when your business has been growing steadily alongside the economy and the market is forecasted for continued growth and prosperity.
Industry Trends: The current state of your industry is also a critical factor in preparing to sell. For example, you would not want to sell your construction business when the housing market is down because the lack of opportunity would decrease the overall value of your business. Research the trends and growth percentage of your industry to find out when things are expected to be the most stable and affluent. Buyer interest will naturally align with an industry on track to be successful so make sure you begin the M&A process during a steady time for your industry.
Seller’s Market: Currently, we are experiencing a Sellers’ Market, meaning there are more active buyers than there are businesses for sale. A Sellers’ Market gives business owners the advantage of carefully choosing the right buyer and getting a higher sales price for their business. Talking to financial advisors or M&A professionals can help you understand what type of market you are in and how to use it to your advantage when selling a business.
Once you have a better idea on the pulse of the market, the next step is finding out if the business is actually ready to be sold. As we mentioned before, the best time to sell your business is when it’s doing well; the financials are trending upwards, sales are booming, the team is strong and demand is high. It can be difficult to walk away when the business is doing so well but that’s the exact time we recommend planning your exit. Buyers are not going to invest in a business that is on a decline or suffering. Not only will the business sell for less, but you may have a hard time getting financing approved or finding a buyer willing to take a chance. The following are telltale signs that your business is in the right place to begin planning your exit.
Predictors that your Business is Ready to Sell:
Financial Incline: Professional business brokers will use your last three years of tax returns, balance sheets and profit & loss statements to calculate the value of your business and determine a sales price. Generally, the most recent year is more heavily weighted than the oldest year, so when your business is on a financial incline, your ultimate sales price will be higher. Three years of steadily growing financials also shows buyers that your business is forecasted for future growth. If you have seen an increase in your numbers over the last three years, we recommend getting a valuation done on your business so you can begin planning for the future; you never know what unforeseen circumstance could affect your business.
Strong Staff: Building a team takes time. Having a strong team of staff in place with experienced, tenured professionals and loyal managers makes all the difference when selling a business. Your staff is often a major selling point during the marketing phase and if you currently have a strong team that operates your business like a well-oiled machine, the business is ready for the sales process.
Diversified Client Base: High customer concentrations are one of the most commonly seen deal-killers in the M&A world, so if you have been working hard to diversify your client base, you are on the right track. A good rule of thumb is to ensure that no client accounts for more than 30% of your sales and if you find that this is happening, we recommend taking action immediately. High customer concentrations can severely limit your buyer pool due to risk and also make it difficult to secure financing. If your client concentrations are in line with the ‘30% or less’ rule, the timing may be right for your business to be sold.
No Impending Capital Expenditures: Every business has capital expenditures from time to time, but you’ll want to get these out of the way if you are planning on selling soon. No buyer wants to walk into thousands of dollars in expenses on Day 1. Handle these expenses prior to the sale and watch your buyer pool and sales price increase.
We cannot tell you how many times we have valued a company at a desirable price but due to a recent influx in business, the owner decided to hold off on selling. A year or two later, the business owner feels ready to sell only to find out their business is worth less than it was before. What happened? There are several elements that go into a successful business and the absence of one could ultimately lead to its unraveling. Oftentimes, these business owners were struck by an unforeseen circumstance such as the loss of a key customer, a change in their health or an unexpected downturn in the economy. After working with over 500 businesses owners during the sale of their business, we understand the heartache of this situation and how frustrating it can be after so many years of hard work. When you decide to get your business valued in order to prepare for the sale, timing is everything. Understanding the key predictors in planning for the sale is good knowledge to have so that you can make the right decision for you and your business.