At some point, every business owner will contemplate selling his or her company and wonder whether the time is right. So when is the right time to sell a business?
The right time is when the company’s future is at its greatest. In fact, the right time to sell is the time you would be least likely to think about selling because the opportunities ahead of you seem extremely lucrative.
When you sell a business, you are selling its opportunities. You are selling prospects for growth and profitability. When we talk to business buyers, 65 percent of the conversation is about the future, 25 percent is about the present and only 10 percent is about the past.
That may seem counterintuitive. Many owners think they are selling past performance and focus on that. But buyers want a return on their investment and that only comes from future opportunities.
For example, we may work with a buyer who says he wants to earn back the purchase price in four years. If the company he buys is earning $5 million in annual profit, he may offer $20 million as the purchase price.
However, if it can be convincingly shown that earnings will increase by $1 million a year, he may offer as much as $30 million as the purchase price. The lesson here is that the growing company can sell for much more than the stagnant company.
– Predicting The Future
You can sell when the opportunity is greatest if you have a sense of when that is. If there’s no track record, it may be too soon. If the growth prospects are minimal, it may too late.
You don’t want to sell at the start of your company’s growth. You have no track record and projections are not credible.
Neither do you want to sell when your company is at or near its peak. Your profitability has or will plateau and you will not realize the maximum sale price.
So how do you look in a crystal ball? We believe you should look through a buyer’s eyes and sell based on what he is looking at.
o Future market size , sell when your market size is the greatest. For example, if your company’s market is the elderly, sell just as the baby boomer generation gets there.
o Current market share , sell when your current market share is recognized in the industry and by your competitors. An example is when you have price leadership.
o Exclusivity of a technological advantage , sell when you have an advantage, e.g., being first with something that no competitor will have for at least six months.
– Sell When In Good Standing
o Current and future margins , sell when your margins are good and there is every prospect that they will be as good or better down the line.
o Something that can be leveraged , sell when you have something that would benefit from an acquirer’s infrastructure, whether that is manufacturing, distribution or sales.
o Before you screw it up , sell before you do something that depresses the future opportunities for your company. For example, trying to do something with your company that a strategic buyer could do better might greatly diminish your company’s value. Unfortunately, this happens often with products with national brand potential.
To sell at the right time, you must also know your industry market. Do not sell businesses in down markets; only sell businesses in up markets and if your business is in an industry with down cycles, only sell when the market cycle is headed up.
Cyclical markets are those that are driven by the economy or interest rates.
– Position For Sale In Good Markets
Examples are construction and real estate, which were hot two years ago but are cooling off now. Automotive is another cyclical market because it is interest-rate sensitive, although dealers probably all wish they had sold a few years ago.
Companies in up markets are ripe for positioning for sale. Today those include business-to-business companies and those supporting the Internet, such as fulfillment, delivery and logistics companies.
Other up markets are technology, manufacturing, software that provides real-time information, communication, training, high-end leisure and travel, and anything that improves efficiency and economy.
An example of a down market is retail business right now, though that will change. There will always be successful niche retail components that offer something the big chain retailers don’t. Basic industries, such as manufacturing, mining and agriculture, are also down markets right now.
Things always change, however, and what is up today is down tomorrow.
There’s more to consider than just market conditions when you think about the timing to sell your company.
Perhaps you should sell it before you make the effort to grow to the next level. If your company’s future is bright enough, you may be able to sell it for nearly as much before you do the growth as you can after the growth happens.
The point to keep in mind is that when you sell your business, you are selling its opportunity. The time is right when the opportunity is greatest.
Currie is managing partner of Shoreline Partners, LLC, a San Diego-based merger-and-acquisition firm.