One of the most frequent questions I am asked by business owners is:
"When is the best time to sell my business?"
To answer this question, we need to examines the three primary types of timing issues related to selling a business. These are:
1) Personal Timing
2) Company Timing
3) Market timing
Issues relating to Personal timing are often the leading decision factor for a small business owner to decide to sell. Personal Timing issues include such things as retirement, illness, and owner burn-out or the desire for change. Most personal timing issues are emotionally driven and usually have very little, if any, positive effects on the value of the business during a sale.
In some cases, such as an illness where a normally active owner is unable to devote time to properly manage the company, the personal timing issues may actually drive down the value of the business. Although no one can tell you the best personal time to consider a sale, waiting until you are emotionally driven by a personal issue usually results in a lower value for your business.
Company timing is probably the most counter intuitive timing issue for a small business owner to both realize and overcome. If you have ever thought, why should I sell, everything is going great? That is probably one of the best times to consider a sale. Very few owners think to consider selling after their "best year ever" or after a manager has finally been trained well enough where the owner feels comfortable taking a vacation. Yet, it is this exact time that more buyers will be interested in the business and be willing to pay a premium price.
Too many owners look to explore sale options after a key employees leaves, a major customers is lost, or after a year when revenue are down. Professional buyers such as public companies and private equity groups normally have the attitude that they won't join any country club that will have them as a member. What does that mean? Simply that they want good well run companies, and are not looking for turn-arounds or fixer-uppers.
Many times private buyers cannot purchase a business with declining sales due to the inability to obtain financing on such a venture. From a company timing perspective, a growing, well run business, is worth more than a declining business with problems. You might be happy to have another year of stable sales but for a buyer, it looks like a flat business with no growth potential. You have probably heard of the saying buy low and sell high, this applies to both public company stocks and the stock of your own company.
*_Market As an owner, you are probably use to being in charge, making the decisions, and determining when things get done. Being in control of these things has helped you and your business be successful. Market timing encompasses all of the factors not related to the owner personally or the company itself. In short, everything outside of the owner's control. This is why market timing is often ignored and very hard for independent business owners to take into consideration.
If you are saying to yourself, that sounds nice but how can I use market timing to maximize the value of my business? Let's look at some examples since there are many types of market factors that can effect timing.
Perhaps you are in a growing industry with consolidation taking place where public companies and private companies with equity backing are making multiple acquisitions. Maybe you have seen a competitor sell or even been approached by one of these buyers yourself. This is one of the best times for an independent company to consider a sale.
These professional buyers are looking to gain market share and economies of scale and are willing to pay a premium to do it. Consolidation plays typically last between 2-4 years. Normally, sellers who take advantage of these market condition early receive the best pricing while those who wait too long see pricing decline or buyers disappear altogether. How much do you think a record store is worth today versus 25 years ago?
Financial Market Conditions
In a broader sense, with historically low interest rates and low capital gains rates, current financial market conditions has created one of the best environments for owners to consider selling.
*Low interest rates *
Since most transaction involve financing, lower interest translates into a buyers ability to pay more for the business rather than paying finance charges. Think of your house as an example. do you think you have a better chance of selling for the price you desire if interest rates are at 6% or at 12%? You house has not changed, only the buyers ability to finance the purchase.
Low capital gains rates
Low capital gains rates means that you, as a seller will be able to retain more money from the sale of your business. If you keep your business, you take money out of it a dollar at a time. With a federal/state personal income tax rate up to 39%, you don't get keep much of your income. Normally, income from a sale will be taxed at a capital gains rate of 15% or below. Not only do you get the businesses future income today, you get to keep more of it!
As a business owner, it is ultimately your decision of when to sell but if you want to maximize the value for your business you should take into consideration your Company timing and Market timing. A reputable, experienced business broker can assist you by providing an unbiased third party evaluation of your Company and let you know if it is ready for sale. Additionally, most brokers are aware who "whose buying what" and they can update you on current market conditions for your industry or geography.
Remember sometimes you pick the timing, and sometimes the timing picks you.
I hope you found this article useful. If you have further questions, do not hesitate to contact me. Please visit our website for other useful tips!
Bridge Ventures, LLC
Merger & Acquisition Advisors