Many times business owners ask about the right time or best time to sell their businesses. There are three basic factors to consider in assessing the proper timing to sell a privately held company: general economic conditions, the company’s performance, and an owner’s personal situation. Each of these factors must be considered both individually and collectively when considering when to sell a business.
A strong economy usually creates a robust climate for M&A activity and attractive valuations for business owners seeking to sell. Despite the current weakness in certain segments of the economy and the uncertainty of the global economy, there is a strong level of M&A activity as prospective buyers are flush with cash and are looking for acquisitions to spur growth in a low growth economy.
Regardless of general economic conditions, a company’s performance is the single most important factor in insuring a successful sale and maximizing value. Buyers are looking for companies with growing sales and profits that are well positioned for continued growth. Other company specific sources of value enhancement include strong internal processes (e.g. accounting and IT), established intellectual property (e.g. brands and patents), and a management team capable of running the company in the owner’s absence. At any point in time, some industries will be considered more attractive than others. However, any business that has successfully operated through one or more economic cycles can be an attractive sale candidate.
“While no business owner wants to leave money on the table, personal factors unrelated to valuation must be considered when deciding on when to sell.”
While no business owner wants to leave money on the table, personal factors unrelated to valuation must be considered when deciding on when to sell. While personal reasons are often unique to each individual and include a wide range of issues, generally speaking they fall into one of three broad categories; family and health issues, emotional burn-out, and a lower tolerance for risk. While family and health issues are usually obvious (e.g. divorce, illness, death), emotional and risk tolerance issues can be more subtle and build over time. Chronic fatigue, constantly feeling overwhelmed, and loss of enthusiasm for the business are examples of burn-out. A lower tolerance for risk may be the realization that the additional years of ownership necessary to achieve revenue and profit goals, or get through another business cycle are incompatible with a business owner’s plans to retire or goal of pursuing other activities.
When planning the timing of a sale, a business owner must allow adequate lead time for preparing the business for sale and completing an effective sale process. Preparing the business for sale may take as little as a few weeks or as long as several years if the business owner needs to implement significant changes in the company’s operations or complete their estate planning. A well-managed sale process conducted by an experienced M&A advisor will typically take 6 to 12 months from start to closing.
Given the wide range of factors affecting timing and the lead time necessary to complete a sale, it is virtually impossible to “time the market.” However, business owners should be cognizant of the factors affecting the M&A environment and carefully consider them in connection with developing and implementing their exit plan. Last, regardless of timing, a business owner should bear in mind that a decision to sell substantially reduces downside risk and allows them an opportunity to diversity their portfolio.
This post was originally published by the Exit Planning Institute newsletter.