There are several factors that determine if an owner is selling a business at the right time. The greatest challenge for many owners is creating a strategic plan based on the owner’s individual priorities. An owner who is happiest post-sale is the owner who stuck to the plan, while a seller who does not reflect on her priorities and objectives beforehand is often disappointed, regardless of the sale price. Business owners are often forced to balance personal and financial priorities; it is critical for sellers to be honest with themselves.
The greatest challenge for many owners is creating a strategic plan based on the owner’s individual priorities.
Just as it is important to have financial goals, a business owner should also define personal goals so that her career does not evolve without purpose. It is impossible for an owner to project how she is going to feel about a matter in the future. Nonetheless, it is helpful to have a plan that incorporates personal goals as a way to benchmark an owner’s current position.
A personal strategic plan, whether it is three, five, or 10 years in the future, can be beneficial, even when life presents unanticipated challenges. Personal issues that can be the catalyst for selling a business range from frustration with the daily job requirements of ownership, to other career dreams, to family matters.
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An owner should not be so engrossed in her business that she does not stop to evaluate whether she is enjoying what she is doing on a daily basis. Regardless of the reason for exiting, it is critical that the owner have a plan post-sale and be aware of the need to manage the transition from owning a business to the next chapter of her career.
An owner who is selling a business thinking she is going to make a second career out of “playing golf all day” is often disappointed. An owner selling a business because she thinks she hates it may later discover that she actually did not hate her business as much as she believed. In contrast, an owner who is selling a business because it has grown beyond her core skills often feels relieved after the fact. A modest amount of introspection can be invaluable.
An owner who is selling a business thinking she is going to make a second career out of “playing golf all day” is often disappointed.
From a financial perspective, it can be difficult to determine the “right” time for selling a business because there are so many factors to consider. A business owner is often so involved in the details of running her business that she does not have the time to look at broader trends impacting her business’s operations. An owner needs to periodically evaluate the life cycle and evolution of her business and the industry as a whole.
These factors can be divided between “micro” factors and “macro” factors. Once an owner looks at her business and industry on a micro, company-specific level, it is easier for her to evaluate the business on a macro level.
Examples of “micro” factors range from what the market demand for the company’s goods or services is like to the competitive landscape.
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Market variables are “macro” in nature. They include industry dynamics, which impact transaction multiples. Other examples include interest rates, the availability of bank debt and the state of the IPO market. So, in terms of selling a business, will you get more money if you wait? Sizing up the micro and macro factors will help determine which seasons or cycles might be more optimal than others for the best possible outcome.
Just as a business owner can benefit from a financial model to evaluate the purchase of an asset, she can also gain from engaging in “modeling” her business in deciding whether it is time to sell. An owner does not need to be limited by a financial model to determine the right time to sell, but can use the model as a guide and benchmarking device.
An appropriate financial model needs to consider factors such as cash flow, exit multiples or financing structures. Emotions have little place in this context. With respect to multiples, it must be emphasized that smaller, private companies typically command far lower multiples than do larger, public companies in the same industry.
Owners should be realistic about the multiples that selling a business will likely produce and understand that transaction multiples used in financial models are a reflection of many variables.
In spite of it all, an owner may ignore her financial model and be reluctant to sell her business, given the amount of annual cash her business provides, and concerns about being able to replace that income through passive investments post-sale. This sentiment is magnified when an owner considers the tax she will pay from the sale. Although this perspective is understandable, it is an incorrect approach would be to minimize the risks in a business, its illiquid nature, and its concentration risk.
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In evaluating whether it is the “right” time for selling a business, it may be appropriate to bring in an investment banker or other professional who understands the company’s industry. The professional can keep the owner focused on the financial aspects of the analysis by creating a thoughtful financial model based on appropriate market multiples and discount rates. A good investment banker will also help an owner refine her priorities, keep emotions out of the decision-making process and implement strategies to do so.
The “right” time for selling a business is subjective. Taking the time to determine your goals can ensure that you embark upon the process at the right time with the correct perspective to minimize seller’s remorse.
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Jonathan Friedland is a partner with Sugar Felsenthal Grais & Hammer, a law firm with offices in Chicago and New York City. Born and raised in a New York suburb, Friedland graduated SUNY-Albany magna cum laude in three years and then earned his law degree from the University of Pennsylvania Law School. Friedland clerked for…
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