by Dave Driscoll
Owners often base the timing of selling their business to a milestone in their lives. Sometimes, owners decide to sell when they realize that taking the business to the next level will require more time, energy and capital than they want to invest. The goal may be to sell the business when they reach a particular retirement age or when they land a sought-after large client, making the business more valuable to investors.
But does the timing of when you sell your business really matter? One of the enduring principles in the investment/retirement planning world is that you can’t time the market. I disagree with this axiom when it relates to the sale of your business. Yes, you can!
Identifying the right time to sell can literally mean millions of dollars in your pocket.
A guiding principle that we share with all business owners is “run your business as if you were going to sell it tomorrow.” Many times, interest in acquiring your business comes when you least expect it, so always be prepared.
When’s the right time to take a business to market?
The right time to consider selling your business is when two things are true:
1. You’ve built a business to a high level of value that can be transferred to a successor owner, which makes your business marketable.
2. The mergers and acquisitions (M&A) market is on the upswing toward a sellers’ market because this maximizes the cash flow multiples expected.
If these two criteria are met, sell the business.
If they’re not, keep running your business, with a focus on being prepared to sell it tomorrow, understanding the internal and external factors that will influence your timing. This month, we’ll examine three internal factors that influence the timing of a sale.
Business owners can control three internal factors:
1. Trained and capable workforce. Can your business be sold and continue to run successfully without you? A common weakness of privately held businesses is reliance on the owner and an underdeveloped team.
If you’ve developed a strong leadership team within your organization and positioned your business to no longer be owner-dependent, you’ve likely built significant transferable value and marketability. In today’s talent-starved environment, employees are an important intangible asset. Buyers are acquiring businesses not only for their revenue, but also for their talented personnel.
2. Strong projected cash flow. Is your business positioned for strong growth?
Buyers buy for return on investment (ROI). Returns come in many forms, including increased productivity from acquiring employees as mentioned above, and a belief in growth potential. Growth is evidenced by well-founded projections based on proven historical data.
If your business has reached the highest profit level possible with the capital and talent resources currently available to you, but you have a strategic plan that demonstrates how additional investments could fuel growth, then the time is right to go to market.
3. Risk. What are you risking by continuing to own your business? Analyze the value of being an owner. How much owner benefit (financial and emotional) do you derive from the business? If you were to sell your business and invest the proceeds (net of taxes), would the financial return, freedom and personal wellbeing outweigh the benefits you currently receive as an owner?
Consider the continued risks involved in running your business. As a company matures and the owners get older, risk tolerance frequently decreases, and burnout sets in. If there’s no family member interested in taking over the business, the continued sacrifices of ownership can be untenable.
Selling your business is a personal choice. When to sell can be influenced by the M&A market’s likelihood to reward your years of hard work to your satisfaction. In addition to your workforce, cash flow and risk assessment, there are many personal and professional considerations when determining the best time to sell your business and pursue your life beyond business.™ At the end of the day, control what you can, as there are so many factors in life that you can’t.
Dave Driscoll is president of Metro Business Advisors, a business brokerage, valuation and exit planning firm helping owners of companies with revenue up to $20 million sell their most valuable asset. Reach Dave at DDriscoll@MetroBusinessAdvisors.com or 314-303-5600. For more information, visit www.MetroBusinessAdvisors.com.