There are multiple factors that determine the right time selling a business. 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 determined her priorities while a seller who does not resolve her priorities and objectives is often disappointed in a sale of her business regardless of the selling price. An owner is often forced to balance personal and financial priorities against one another. It is critical for an owner to be honest about her skills, desires, timing and business.
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. Although it is impossible for an owner to project how she is going to feel about a matter in the future, it is nonetheless 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 helpful even when life presents unanticipated challenges or issues.
Personal issues that can be the catalyst for a sale range from frustration with the daily job requirements of ownership and second career dreams to family matters. An owner should not be so engrossed in her business that she does not ask herself if she is enjoying what she is doing on a daily basis. Even if an owner decides to sell due to her distaste for her business, it is critical that the owner have a plan post-sale and be aware of the transition from being a business owner to the next chapter of one’s 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 professed. In contrast, an owner who sells as a result of the business growing beyond her core skills often feels a sense of relief after the fact. A modest amount of introspection can be invaluable.
From a financial perspective, it is often more difficult to determine the right time to sell given the numerous factors that must be considered. These financial factors can be divided between “micro” factors – those involving the business and “macro” factors – market variables that range from transaction multiples and interest rates to availability of bank debt and the state of the IPO market. While “micro” factors range from how the market may be changing for a product or service; to what new competitors are coming into the market; to what the payback is on a new service or product. The owner is often so involved in the details of operating her business that she do not have the time to evaluate broader trends impacting her businesses operations. An owner needs to periodically evaluate where her business and industry are in in terms of “life cycles” and evolution. Once an owner has a view with respect to her business and industry on a micro, company specific level, it is easier for an owner to evaluate the business on a macro level.
Just as an owner can benefit from a financial model to evaluate the purchase of an asset, an owner can gain from engaging in modeling her business to instill discipline in deciding whether it is time to sell. An owner does not need to be limited by a financial model to help her determine the right time to sell, but can use the model as a guide and “benchmarking” device.
However, an owner who creates such a model in order to be paid a certain “number” or purchase price for her business is often disappointed since her number might be too little or much given that the “number” is typically based on emotion versus cash flow, exit multiples or financing structures. Equally important, an owner of a middle market company who believes she can obtain the same inflated transaction multiple being paid for large, public companies in the same industry may be frustrated by the price her businesses commands in a sale process. As an owner, you should be realistic about the multiples your business is worth and understand that transaction multiples that are used in financial models are a reflection of many variables that are different for large, public companies relative to smaller, private companies.
An owner may ignore her financial model and be reluctant to sell her business given the amount of annual cash her business provides her and her appropriate concern about being able to replicate that annual income through passive investments post-sale. This sentiment is magnified when an owner considers the amount of tax that will be paid as a result of a sale and the current low interest rate environment. Although this perspective is understandable, an owner often incorrectly minimizes the risks in her business, the illiquid nature of her business, and the limited financial diversification that her company provides. Click here for an excellent story about a couple thinking about selling a business and who are trying to determine if the money they get will be enough to fund their retirement.
In evaluating whether it is the “right” time to sell a business, it may be appropriate to bring in an investment banking advisor who understands the company’s industry and can help keep the owner focused on the financial aspects of the analysis by creating a thoughtful financial model base on appropriate market multiples and discount rates. A good investment banking advisor will also help an owner refine her priorities and implement a strategic process to do so.
The ‘right’ time for selling a business is a matter of subjective opinion. Taking the appropriate amount of time to determine one’s goals can help ensure that the process is embarked upon at the right time with the correct, realistic perspective in order to minimize seller-remorse.
Brad Pickard is a Managing Director at Republic Partners, a mergers and acquisitions boutique located in Chicago, IL. Brad has spent over 25 years in private equity and investment banking. Brad began his career with Salomon Brothers (now Citigroup) in investment banking. Brad joined Wasserstein Perella (now Commerzbank) in 1993. As a partner at Wasserstein…
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