As I meet with entrepreneurs, I’m often asked the same question: “When is the best time for me to sell my business?” The answer to this question is not the same for every business owner, for many reasons. For instance, an entrepreneur may want to sell for personal reasons, and not for reasons related to the business or its financial condition. Unfortunately, when personal reasons drive the need to sell a business, the outcome is typically not ideal. More positive results are obtained when entrepreneurs are willing to chart a course as they consider selling and realize it’s a process, not an event.
If an entrepreneur wants to optimize the sales price of his or her business, it is best practice to establish a three-to-ten year timeframe to sell the business. This may sound crazy to some, but hear me out.
There are three factors which have the most impact on the value of a business when it is sold to a third party. Two of the factors are not in the business owner’s control while one is. It’s been my experience that entrepreneurs typically don’t like things they can’t control. Sorry if this seems like a blunt statement. Nonetheless, it’s true.
If an entrepreneur wants to optimize the sales price of his or her business, it is best practice to establish a three-to-ten year timeframe to sell the business.
So if you’re an entrepreneur and want to sell your business, what should you do?
1. The business’s EBITDA or the cash a business produces over a three year period. This single factor is controllable by adopting proper planning to create a profitable business model that’s executed by good management.
2. The Industry in which the business operates. Is the industry growing, exploding, shrinking, or disappearing? If it’s one of the latter two, the business owner has a much shorter timeframe during which to sell before the business’s value may be gone. Alternatively, if the industry is either growing or exploding, the timing of the sale is critical due to changing valuation multiples. These values may change rapidly so it pays to know the current industry multiple and the direction in which it’s moving.
3. The M&A climate, or in other words, the relative cost of capital for private enterprises. Mergers and Acquisitions activity goes up and down. If an investor is unable to find sufficient returns on his or her money by investing in stocks, bonds and real estate, then investing in a private enterprise becomes more attractive. That’s when the M&A climate is most favorable. Conversely, when the stock, bond and real estate markets are healthy and producing nice returns for investors, buying private enterprises falls out of favor.
The entrepreneur is truly only able to control the EBITDA their business produces, so I recommend focusing on improving EBITDA first. By doing so over a three (or more) year timeframe while keeping an eye on the industry itself as well as the M&A climate, an entrepreneur will be well positioned to take advantage of good timing when it arrives.
I was glad to see one of your 3 key points was about the industry. A number of years ago, a PE group gave me the ‘interim’ (2.5 years!) CEO role in a struggling midwest industrial mfg company. This company’s industry was in upheaval – consolidation of competitors, consolidation of customers, new foreign competition, significant product substitution and escalating raw material costs. It was a mess. The investors were aware of the evolving world, but their hubris over the company’s #1 market position gave them false expectations about saleability and value. Tried to sell to the #2 competitor but the FTC blocked the deal because of anti-trust issues. Finally sold to another financial buyer but not at ‘top dollar’.
Thank you for sharing your valuable experience with our readers! Industry upheaval is a unfortunate situation I’ve experiences with clients as well. And when the entrepreneur is in their 60’s or 70’s, they have run out of time. Timing can be everything!
All the best to you Jim!
In addition to the factors noted, the seller can maximize after-tax proceeds if he/she can allocated a large portion of the sale price to personal goodwill and can demonstrate that intangible non-corporate goodwill assets are a large part of the transaction price. Finally, whatever the setting, the seller must remembers rule 1: the transaction value is only equal to the selling price when there are no contingent payments and/or payments are made over time.
This exiting climate will become very crowded over the next twenty years. More supply than demand, which will naturally cause valuations to suffer.
It is important during this period of exit planning to improve and maximize value. Value can be increased without increase in revenues by assessing and uncovering the company specific risk. The higher the risk the lower the value. Then by implementing initiatives to improve value…the return at the time of the actual sell will be greater, and the new owner comes into a well run company.
Owners should make it a goal to reach Transferable Enterprise Value: A measure of Sellable Value driven by a company’s Opportunity and Capacity to generate Increasing future cash flows in a Predictable, Reliable, Sustainable manner.
Michael, thanks for your thoughtful comment. Indeed, this is an important time for business owners to do what they can to improve the value of their business!
I’m looking forward to learning more about what you do to help business owners.