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Is Now a Good Time to Sell Your Company?

 June 21, 2004

 By MICHAEL CARTER

 Ben just received a letter from a large competitor in his industry making an informal offer to buy the company he founded 22 years ago. He has received dozens of form letters like this and ignored them all but this time he read on. Although he had grown the business, debt continued to increase and his own salary had leveled off. Competition from imports, never a big factor, was now heating up.

He knows his business is peaking as growth has slowed. His legal bills are increasing as business in general requires more attention to regulations, intellectual property ownership, and human resource issues. Although he enjoys the business, it is no longer the fun it had been in the past.

At the suggestion of another chief executive officer, Ben makes a decision to systematically analyze his business and quickly reaches certain conclusions. The business now requires more capital. He used to be the small niche player where building market share was easier. His customers have become much more knowledgeable and are continually pressing for price concessions 

This analysis results in Ben becoming increasingly anxious about his business, not because he doesn't believe in the business, but because so many key factors are out of his control that could seriously impact the future. Furthermore, the sell now/sell later analysis he conducted was totally dependent on the price (value)-earnings ratios at the time.

Ben has just learned about price-earnings ratios from his stockbroker. The big question he had is why certain companies sell for a 30 P/E ratio vs. 18 for the overall market. His broker's response stays with him. P/E ratios are determined by the market's view of the future.

Key factors are: sales and earnings growth and perceived riskiness and uncertainty of the company's and industry's future.

What factors should owners consider in their decision to sell their business? We have heard this question for years and have come up with 10 important factors to think about:

1. Your personal / business objectives?
2. Where is your business in terms of its own cycle?
3. Where is your industry and economy in terms of their cycles?
4. Can you and your team take your business to the next level?
5. How will the key trends in the industry impact your business?
6. Where is the industry in terms of consolidating?
7. Are smart deep-pocketed buyers/ investors making purchases in your industry?
8. What capital requirements are necessary to reach your objectives?
9. Where is competition coming from? Where will it come from in five years?
10. Where are comparable businesses valued? Three years ago? Today?

These 10 are the starting point for your answer. Most important are the owner's personal and business objectives. For example, when owners become bored, their passion wanes. It will be very difficult in any business to build value where owners' are not fully engaged in the business. We have mistakenly assumed "it's about the money." But over the years, we have learned business owners are quite complex and there are always other objectives.

Key to knowing when to sell is being able to react quickly and make a fast decision. Once a decision is made, the planning stage can be anywhere from three months to two years. One can only properly execute a successful sale of a company, if the right planning and house cleaning has been done ahead of time.

Michael Carter is a managing director of Carter Morse & Mathias, an investment banking firm based in Southport, Conn., specializing in raising capital, mergers and acquisitions, and valuations.