The Right Time To Sell Your Business

By MICHAEL CARTER

The question we are most frequently asked is, “When is the right time to sell my company?” Obviously, there is no simple answer to this question. However, we would like to provide you with some of the key issues that need to be considered.

Our answer has three levels that need to be addressed: personal, business and shareholder value. Although one of these may be the catalyst for asking the question, invariably these considerations are intertwined.

Personal

The following questions may provide you with some guidance:

Am I still having fun?
Do I still have the fire in the belly?
Are there personal issues that need more of my attention?
Are other personal goals becoming more important to me?
Have I accomplished what I set out to do?
Am I getting tired more quickly?

We find that critical introspection of personal issues may prompt the entrepreneur to think seriously about selling their business.

The classic entrepreneur who is miserable the day after selling is often a myth. We have found more often than not that entrepreneurs who have interests outside of their business jump into these pursuits with the same enthusiasm they had when running their business.

We believe the following are requirements for running and growing entrepreneurial companies. Entrepreneurs must:

Enjoy the process
Have the desire to “win”
Be able to focus their energies on the business
Believe there are more goals to reach
Feel energized by the business.

If any of the above are out of sync, there are problems.

Business

Our approach focuses on assessing a business’ risks, vulnerabilities and trends. Below are a few issues that lead to us to recommend exploring a sale:

Increased Competition
New Competition
Aging product line
New technologies
Need of additional capital
Management team is not keeping up
Growth is slowing

Any of the above can mean you are dealing with a new business model where your business needs a major change in strategy, objectives and/or risk profile.

We find many entrepreneurs settle into a “comfort zone” in which they are relatively successful, but fail to recognize the need for change. What puts you on top does not ensure that you will stay on top. Today, with technology obliterating old business models, entrepreneurs with safe niches have to be aware of and stay ahead of the technology curve.

For example, changing competition may require you to change your distribution system to something that you either know very little about or feel uncomfortable introducing. However, selling your business to a company with a state of the art distribution system in place may not only be a quick solution, but it may take your company to the next level and keep it competitive without an enormous investment of time and money.

Shareholder Value

If your primary goal is to maximize shareholder value, then deciding when to sell your business is very similar to deciding when to sell a stock. There are many variables of value, but some of the key drivers are:

Sales growth
Earnings growth
Market Share
Technology
Management

Monitoring these financial variables are key to deciding when to sell. Clearly, your financial results are a major factor. Best time to sell is on the upside.

External Factors

Industry Fundamentals
Economic Fundamentals
M&A Marketplace

You need to understand where your industry is in its own life cycle. Declining and aged products and industries earn lower multiples. The key is to sell prior to the general acceptance that the market has matured or when its determined by the marketplace to be a winner.

Two key factors that have made the most impact on fragmented industries are determining whether the industry is ripe for consolidation and if a business can be successful on its own. Selling to a consolidator takes great timing, knowing to whom to sell and a having good read on whether your industry will be consolidated. You don’t want to be too early, as the risks may be too high, and not too late, as the terms and value are less generous and industry appreciation has already occurred.

The M&A markets are cyclical and are often driven by the economy, stock market, P/E ratios, availability of capital, industry changes and consolidation, capital gains rates and other economic factors. We have represented companies where a hot M&A market for a particular industry had a significant impact on that company; where only 12 months later the heat of the market had cooled significantly.

For most, the economic cycle is a key variable, however, industry cycles have become more important as some industries go through separate cycles from the general economy. A strong economy generally means high valuations, supply shortages, optimism, less uncertainty, and availability of capital.