When to Sell a Business, an Owners Dillema?

“When to sell a business” is a question often on the mind of business owners. The quick answer from a veteran owner of many businesses is “the best time to sell is when nobody wants to sell”. When business is good, owners tend to hold on to them despite their being many buyers with strong balance sheets willing to pay good prices. When business is weak, many buyers tighten belts and if looking for acquisitions are typically shopping for bargains.

Unfortunately for most owners, the timing of when to sell a business is not so simple with a myriad of factors influencing their decision and timing. Key issues include current business performance, waiting to secure new contracts, how a new product will perform, staff challenges, strength of the market, health matters, age, retirement plans, bank and funding pressure or sudden interest from a prospective buyer… The age of the owner is however the most common reason for the sale of a mature business with the owner looking to secure their health and retirement and de-risk family wealth.

Market Timing

When business is tough, buyers are few and far between and looking to secure a bargain. When business is good, owners see the good times never-ending. Perhaps they see a year or two of strong profits ahead. The future does have the risk of the unknown and although tough times are hard to predict. Thoughts like “it’ll be different this time” or “we’ve gone through tough times before” tend to lend themselves to complacency, it is most important to have a well-considered sale strategy.

It is important to understand and know what is “going on” in the business sale market.  Most owners, although extremely knowledgeable of their business and industry, are not nearly as familiar with the buying and selling of businesses in their space. Owners pickup anecdotal comments on some transactions without knowing the details. Good headline grabbing newsworthy stories are the ones most noted  however they are silent on strategy, time and resources involved in achieving a successful sale.

Business Valuations

The financial performance of the business over the past 2-3 years is most significant when valuing a business. Buyers extrapolate and overlay performance with their own interpretation of the market. They then add their own view of the future and may exaggerate both upward or downward forecasts. Using market trends and recent financial performance, buyers are identifying their risk and reward and ultimately investment returns. The difference in valuation and prices paid for a business on an upward trajectory compared to one on a downward trajectory is substantial. This risk and value difference can easily outweigh the benefits of one or two years of future earnings.

The motivation and reason for the sale also influences price. Buyers are keenly sensitive to a sellers intimate knowledge of a business and its markets particularly extremely cautious with those suddenly wanting to suddenly exit. Does the owner know something that others don’t?

When to sell a business, how long is the Sale Process?

The time taken to sell a business will also influence timing of when to sell a business. For mature businesses the average sale period is 9 months. It can however be as short as 2 months or as long as 18 months. Sellers also need to factor in the time taken to engage an advisor and get their business investor ready.  Many owners, with a strategic approach, prepare their business for sale over a long period before the actual sale process commences. This may include restructuring the business for post sale. It may include recruiting and training key managers, undertaking strategic reviews and finalising outstanding contracts.

Typically the sales process is structured in phases. Advisors will take 1-2 months to prepare the sales material (time impacted by availability of sellers financial material). Phase 2 is marketing and approaching potential buyers. The marketing phase may take 1-3 months to secure genuine buyers. Completion phase typically takes 1-3 months to closure.

Who will buy my business, types of buyers?

A common misconception is that in most business sales, buyers typically knock on the door unannounced. They then make a magnificent “offer too good to refuse” and the rest is history. This does happen but rarely. As with “hope”, chance is not a strategy and cannot be relied upon.

Buyers will range from financial investors to strategic. Financial investors typically have a short-term view on ownership and financial return. Strategic buyers typically have a long-term view of acquiring expertise, customers, markets or geographic location and building a business.

As a business owner your leadership has required enormous energy focus and dedication. Contemplating the sale of your business in which you may have invested many years of your life and in which you have more than a little emotional attachment, is a major event and one in which there will be uncertainty, some doubt and a kind of lonely uneasiness…