I often get asked, “When is the right time to sell my business?” It’s tough to answer because there are so many questions that immediately come to mind. The easy answer is to sell your business when you get an offer that you can’t refuse, but that’s not helpful or realistic. This is a question that comes up time and again. It is always a difficult question to answer, and changing circumstances can drastically change the timing for business owners. There are always some factors to consider when selling a business. Take the last 18 months for instance.
- COVID-19 Pandemic.
The coronavirus creates a global pandemic that we’re still seeing the effects and ripples across many countries, regions, and industries. Should you have sold before it became bad? Should you sell your business now since it’s mostly over? Should you wait a few years? Do you get a bump in price because we saw work increase? Do you have to sell your business at a discount because we are having supply chain issues?
- Rising Interest rates.
Interest rates are still at record lows, though starting to creep up with expectations the Federal Reserve will raise rates in 2023. What does that mean? The cost to borrow funds to acquire businesses will go up, making it more expensive to leverage debt financing to buy a business. How will that affect buyer demand? Will it reduce the number of qualified buyers for your business?
- Raising Income Tax Rates and Long-Term Capital Gain Taxes.
Current political majorities intend to raise the long-term capital gains rate, as well as taxes on the highest income earners, or those that made over $400k. To translate: Since business income for most business owners flows through to their personal tax returns, that affects many entrepreneurs and definitely middle-market business owners. Long-term capital gains taxes are the biggest chunk of taxes on the sale of a business, so raising the rate will definitely affect take home proceeds from business sales.
- Potential Rise in Inflation.
That’s like talking about the rise and fall of the stock market, and it’s always something on economist and business owner’s minds. Are prices going to rise? Will it cost more to buy raw materials from my supplier? Will it cost me more to hire good employees? Questions, questions. If costs go up, our expenses will go up, and if we don’t raise our value to our customers, how can we pass off the increase costs to our customers?
- Global Unrest.
Look at the crisis in Afghanistan right now. Regardless of your political affiliation, this could have been handled differently and much better. I was literally meeting a few colleagues for drinks last night, and one of them apologized to us for constantly checking his texts. He said, I quote, “I’m helping a few of my friends in Afghanistan exit the country right now, and I have to stay on top of the situation.” Amazing and scary at the same time.
There’s a lot of turmoil and heartache, which creates unease in the markets. What’s going to happen? Could there be war on the horizon, again? Who knows, but it’s something to think about. Could this affect the strong seller’s market we’re seeing right now? It’s possible, but only time will tell on how this is managed going forward. Hopefully, we see this come to a swift and definitive resolution, but the Middle East has always been a hot bed of churn and strife, at least in recent decades, so we’ll have to wait and see.
There are other considerations on timing that come up when you’re thinking about the best time to sell your business, and this holds true regardless of industry. Granted, a dog is a dog, and a diamond in the rough is a rarity in any market, but let’s stay grounded in our assumptions.
- Industry Buzz.
Every pundit talks about timing the market. “Your industry is hot right now, so you should sell while buyer demand is high.” There is some truth to that. Advances in technology, consumer demand trends, supply constraints and more all affect the need for what your business provides.
Industries all ebb and flow, and in general, trade across a range of multiples, some naturally higher than others. For example, a hot technology stock will typically trade at a much higher multiple than a paper company. Now there is one thing that goes without saying – a great company is a great company regardless of industry, and the shining stars and top performers will always find interested buyers.
- Strong Financial Performance.
There’s an old saying that buyers are interested in companies that are thriving, not surviving. There is truth to that, but what does that really mean? First and foremost, buyers want to feel secure that you have a strong track record of keeping accurate and complete accounting records. That goes without saying. Any errors or irregularities in your financial records are a strong indicator that the financial statements are not presenting the facts, and buyers will go elsewhere.
Secondly, assuming you got the first part right, buyers like to see a positive growth trend. If your company shows revenue/sales growth of 30 percent year-over-year and net profits trending year-over-year at 20 percent, your business is performing really well and showing strong signs that a strategic buyer could scale and grow your business to the next level. Companies with declining revenues and profits are not in a position to sell and will definitely leave a lot of money on the table if they go to market, and if they attract any interested buyers
- The Wow Factor.
Some businesses are unique, creating value across all sorts of industries that allow them to charge more for their products and services. Think about Apple and the launch of the iPhone, GoDaddy’s Superbowl commercial with Danica Patrick that made domain hosting sexy, and the super niched AD/HD fidget spinner that went from zero to 100mph in no time. When you’ve created a defensible mote around your competition and built a following of raving fans and customers, you’re going to build enterprise value. When you do that, you’ll attract multiple buyers for your company.
- The Cash Machine.
There’s another saying that is true in business but rarely taught in business school: “Cash Is king.” I’d say it another way – “Cash coming in faster than it goes out is gold.” Buyers are always looking for companies that have found a way to fund themselves. Customers who pay for their products and services in advance, or pay for a year up front, with no credit terms are extremely valuable, especially recurring revenue streams from automatic customers. This means that money comes in immediately before you have to pay your vendors, sometimes weeks and months in advance.
What does that mean from a buyer’s perspective? Your business can scale and grow much faster than a competitor who has credit terms, say Net 30 or Net 45. The working capital costs to run a business with credit terms versus the business where customers pay in advance can be hundreds and even millions of dollars. That affects the price buyers are willing to pay, and should of course be something you seriously pay attention to.
- The You-Proof Business.
This sounds like the opposite way of thinking, but nothing can be further from the truth. The more your business is reliant on you as the owner, the less valuable it becomes. Think about it. If your customers want to spend more time with you than your team, if your team comes to you for solutions to all the problems that come up, then you’ve got a problem. Your business cannot survive, let alone thrive, without you. Buyers are very sensitive to this and know that without you, the business has no viable way to grow and scale, so buyers almost every time walk away.
Businesses with the seller’s name in the business name, companies with a larger- than-life business owner, all have issues selling. The key is to cross train your employees on what you do as the owner, and delegate approvals and authority to your managers and other key employees. This is so important – you must you-proof your business to maximize your enterprise value.
If it’s impossible to do this 100 percent, and I realize there are reasons for this that come up, you may get offers that require you to remain working in the business for several years after the sale until that owner dependency goes away. The question is, are you ready for that? Is that an option for you when you sell your business? Maybe so, maybe not.
- Customer Satisfaction 2.0.
I’m not talking about those fancy customer satisfaction cards that everyone hates to fill out, or God-forbid an online survey that takes one minute and turns into fifteen. I’m talking about a way to measure your business’s potential for high growth.
Without going into too much detail―that’s the basis for another article―what if you could very simply and easily get information from your customers that could tell you how your company’s growth potential compares to others? A global index, if you will? You can, and it’s called the Net Promoter Score, created in 2003 by Fred Reichheld, a partner at Bain & Company. The results from the simple survey produce a score from 0 to 100, with the average business scoring a 15. The world-class brands with the highest potential for growth score in the 50+ range, like Amazon, Marriott, Harley Davidson and AT&T.
What’s the simple secret? Ask your customers this question: “On a scale of 0 to 10, how likely are you repurchase from me or refer my business to your friends and colleagues?” Then, leave an open-ended question asking for feedback on what you do well or could do better. You’ll be surprised and thrilled with the results. Research the net promoter score to learn more on how the score is calculated, and feel free to reach out to me with any questions.
- Customer Concentration Risk.
This is always evaluated by buyers, who are all about mitigating risk when looking at a company to buy. What are they not seeing? What are they missing? What could go wrong? These are all questions they’re wanting answers to. If 50% of your business comes from one or two customers, that’s a problem to a buyer. What if those customers go away or purchase a lot less after the sale? The buyer would pay much more for the company and very quickly see revenues reduced significantly after the sale. They can’t immediately fire a bunch of people to offset the lost sales, so they’re stuck paying the freight until business improves. So, when buyers see a customer concentration issue, they almost always walk away or make a much lower offer to account for the risk
- Supplier Dependency.
A seller in the telecom industry had a supplier they used to purchase most of their gear. When they sold their business several years ago, the seller only got 50% of his asking price up front. The remaining 50% was contingent on a 5-year earnout where the seller had to achieve certain targets before he could “earn” the remainder. On top of this, while the business sold for low 8 figures, the multiple that the company sold at was only 3.2 times EBITDA (“earnings before interest, taxes, depreciation and amortization), which was much lower than the industry standard.
Had the seller had two more vendors he worked with that had better negotiated vendor terms, he could have sold the company for more cash up front and a higher multiple. And that’s a much more lucrative, bird-in-your-hand versus two in the bush offer.
- Key Employee Reliance.
Most businesses have one or a few key employees they rely on to run the business. They serve a variety of roles, from your trusted Chief Financial Officer to your VP of Sales, to your Head of Customer Service and more. Each business is different, but it goes without saying that buyers buy the company, the business, first and a close second is the employees. Without them, you don’t have a business. Now, granted, there are those rare businesses that build with none or a few employees, but those are your outliers. It’s important to set up incentive compensation plans that reward these key employees for their service and incent them to stay on with the business after the sale. It may also be in the owner’s best interest to involve these key employees in aspects of the business sale, letting them know what’s happening in advance.
Talking to a friend in the industry, she relayed a story to me of an owner who hired a lady out of school who grew up with the company, climbing the ladder to become the VP of Operations. She was largely responsible for the growth of the company. When it came time to sell, the owner elected to not tell any of his employees, including his prized VP of Ops. A day before the sale, the buyer asked if he could speak with her and a few of the employees, and during the conversation, it was slipped that the owner was selling the business. The VP of Ops left the interview, went to her boss and demanded 10 percent of the sale price or she’d walk.
The business sold for $10mm, so that cost the owner $1mm, which he was quick and ultimately happy to give his key employee. One can argue that the owner netted $9mm, but had he done some proper planning up front, he could have reduced this risk or set up a vesting schedule to defer compensation downstream. The cost was $1mm, regardless, which is a lot of money. Either way, he got lucky that the employee stayed for many years and grew the company even more, but often, things do not work out for the best and can completely fall apart.
So, those were the factors necessary to consider when selling a business. Now, there’s one other area I’d like to explore on the timing of when to sell your business, and it focuses on the business owner and his or her reasons for selling. Let’s explore some of the possibilities and their effect on the owner after the sale, and even the impact on the timing of the sale. We’ll discuss two categories of an owner’s reasons for selling. The first are what we’ll call “push factors,” or reasons why the owner is pushing themselves out of the business. Visualize someone shoving them out of the business, and you have a good idea of these types of reasons. The other category of reasons why owners want to sell their business are “pull factors.” The owner has a positive reason(s) for selling the business, something to look forward to after the sale. In both cases, it’s good to have a business exit strategy well-prepared.
- Owner or Spouse Health Issues.
This is a serious consideration and oftentimes comes out of nowhere. A seller goes to the doctor for a routine physical only to find out he or she’s got Stage 4 cancer. Fill in the blank on what type of cancer, it really doesn’t matter. This is horrible news that affects the family and of course the business. The owner immediately thinks they have to sell now, and of course, time is of the essence.
With that said, the owner needs to look at their company and/or operating agreements to understand the buy/sell provisions and how their estate is handled in the event of their death prior to the sale. Are there succession plans in place that govern how to operate the business if the owner passes before the sale occurs? Does the succession plan provide enough detail to help the prospective or new buyer continue operating the business with little to no discussion? All of this needs to be planned for and developed, hopefully in advance of news like this.
- Parents or In-Laws Failing Health.
Business owners of any age, but especially Baby Boomers and many Gen Xers, are reaching an age where their parents are in their seventies and up. As we all know, all sorts of potential health scares can come up. If the parents are far away or their loved one’s conditions require a lot of care and attention, the owner may feel they need to sell a business. This all makes sense, but the timing may be horrible. The business could be experiencing a decline in sales and profits; in other words, they’re surviving not thriving. There could be a recession going on, or their industry could be commoditized or not marketable right now. Any number of things that could affect the value of the business at exit could be present, but the owner(s) still have to sell. It’s sad and disheartening but true in too many instances to count.
I’ll recount a story from a recent discussion with a business owner who was referred to me by a friend. My friend said that he knew there was very little I could do but asked if I would visit with the owner. When I spoke with him, he said his wife started their yoga business 10 years ago, and she was the driving force and recognized face of the company, growing it from her to over 200+ niche fitness instructors across the nation. They were unique, because her company focused 100 percent on children, and she’d carved a niche. Unfortunately, she got early onset dementia and couldn’t run the business, and the husband was forced to take over. He was not the face of the business, as you can imagine, and the business over the last few years declined significantly in terms of revenue and cash flow. I gave him a number of recommendations to stop the bleeding and turn the company around, but sadly, this was not to be. I also gave him a way to reach out to a variety of potential buyers, and ultimately the business was liquidated in a fire sale. While the husband was able to pay off all of his debt and broke even, the company’s true enterprise value was never realized.
It’s such an ugly word but so prevalent in today’s society, especially in the United States. Often, the property settlement after a divorce requires a sale. Again, the buy/sell provisions should have been reviewed in advance to manage this process and govern how the company’s enterprise value is determined to split the resulting net proceeds 50/50 between the spouses. Since there are always hurt feelings in these cases, and justifiably in most, this process can be brutal and disruptive, and if not handled properly, can result in a sale for much less than the owners want due to deadlines mandated by the judge in the divorce proceedings.
While no one wants to go through this, proper planning is vital to smooth over the process and mitigate the potential pitfalls of selling due to a divorce.
- “Sick of Running the Business.”
I’m always amazed by this, being an entrepreneur and business owner myself, but it happens to business owners more often than you’d think. They’re just flat out sick of running their company and want to get out as fast as possible. Many thoughts run through the owner’s mind when they’re at this stage, from shutting down the business, working way too many hours for too long, tired of dealing with their employees and their issues. The list goes on, but the mandate is settled. Sell a business now and sell quickly.
In our experience, this is a delicate issue, because owners in this state of mind are not happy sellers, and that translates into lackluster management meetings with potential buyers, who pick up on this. Many times, they’ll walk away. If this business owner doesn’t love their company, why should they? What other issues are lurking behind the scenes that a buyer doesn’t know about. We’ve found our role shifts to that of a therapist, if you will, helping the owner remember the good times and why they got into the business to begin with. We have to recharge their entrepreneurial spark, which in turn drives energy into the sales process. Without that, a sale is difficult at best, and even if a sale happens, the seller very rarely leaves the negotiating table satisfied. It carries with it disdainful memories that can haunt a buyer many years after the sale.
- Dispute Between the Owners.
This is frustrating because, like a divorce situation, the blow-up that’s leading to an owner separation could easily have been mitigated if there were proper communication channels set up in the beginning to address issues, challenges and concerns. That’s not the case now, since the molehill is an insurmountable mountain, but again, our job roles multiply as we navigate these troubled waters to find a solution that is a win/win for the owners. This all has to be flushed out prior to going to market so we don’t hear the bad feelings gushing out during negotiations with potential buyers.
Our ultimate goal is to maximize the value of the company at exit and to present a company that is “built to sell” for potential buyers. This must be communicated frequently to the owners so they remember that regardless of their dispute, they want to receive high offers for their business, not discounts because of management issues. Remember, buyers are always thinking about risk, and if they sense there is a dispute among the owners, they’ll wonder what the employees think. Who’s right in their eyes? Are there battle-lines drawn between two or more key employees? The entire business could unravel before everyone’s eyes if this is not handled carefully and delicately, hence why our company will also spend time deciding if this is worth pursuing.
- Spending Time with Friends and Family.
How many spouses have lamented to their loved one that they work too much and they never spend enough time together? Many business owners feel that they’re trapped in their business, or that they realistically cannot spend as much time as they’d like with family and friends. The thought of selling their business and retiring, relaxing with the people they care about the most, is a powerful selling motivator. The good news is that this reason usually has full support from the owner’s spouse, and I say usually because some spouses are ready to kick their significant other out after six months because they’re stir crazy! Either way, there’s a balance to be achieved, and this is a good reason to sell.
- Traveling the World.
Traveling to the many countries and beautiful destinations we dream about takes resources, planning and time. Time is the great equalizer, and it’s the resource most business owners do not have enough of. So, many trips go unplanned and never taken as the business owner promises that “we’ll go next year,” which many times never get fulfilled. Now, the owner can dream about life after the sale and the adventures that wait, which are plenty, especially when a middle-market company sells. It’s exciting for the owner and his family, and many happy, life-long memories are just around the corner when the sale is consummated.
- Volunteering At Their Favorite Charity or Organization.
I used to be on the national board of the American Lung Association, and my wife and I “many moons ago” chaired the silent and live auction for the Evergreen Gala in Dallas, TX, which benefited the American Cancer Society. Then, life comes at you fast, kids are born and businesses are built, and the volunteerism slowly dwindles. That’s not to say that I don’t volunteer, I do, but many business owners lack time for important organizational work that fuels their passion. There’s a joy to volunteering for your favorite charity church or professional organization, and many owners choose to pick that up again after they sell their business. They look forward to helping for a good cause, and they have the time and energy to continue making a difference. This is good for the soul and benefits many, and the kindness of business owners is demonstrated in their time and their ability to contribute financially. Of note, I’d suggest visiting with your financial advisor on different tax strategies if you want to donate funds to your charity. You can also talk to a Final Ascent Wealth Advisor through our sister company, Final Ascent Wealth Advisors, LLC, a registered investment advisor. To learn more, visit https://fawawealth.com.
- Picking Up Their Long-Forgotten Hobby.
I got invited to play golf six weeks ago at Cowboys Golf Club in Grapevine, TX. It’s larger than life if you know Jerry Jones, and what’s more, it had been 10 years since I’d played my favorite hobby. I practiced a ton, had my share of ibuprofen, and prayed I wouldn’t die throughout the course of the round. The heat index was 108 when we teed off at 1:30 p.m., and while I must say we were all hunting for shade during the last few holes, I had the time of my life. I love golf – it was my favorite sport growing up, but life and the business got in the way, and it takes too long on the weekends. But there’s nothing better than that perfect chip rolling into the cup and the feeling of a ball launching off your club. Memories for me and hard knocks that I need to pick this back up again, which I promised myself I would.
Does this bring back memories for you and your favorite hobby you’ve left untouched for so many years? I’d suggest starting small in the interim, then think long and hard about the hobby or two you’d like to pick back up, or even learn. For example, I’d love to take a course in woodworking and learn how to build something nice for the house, buy all the tools, build a work shed or convert part of the garage to a woodworking shop. Can you feel these thoughts gently pushing you to sell your business? It’s a nice feeling and a great reason to think beyond life after the business.
- Mentoring Other Business Owners.
When you sell your business, maybe a middle market company that sells for $10mm and up, you’re in rarified air. You’ve just achieved the American Dream at a high-level, and you’ve gained a tremendous amount of experience, from starting a business to growing it properly, to preparing it for sale all the way through a successful exit. Many business owners dream of giving back by mentoring other business owners.
I love to do this by leading our exit planning practice, creating business exit strategy and helping business owners grow the value of their companies. Getting them ready to sell and attractive to buyers, it’s like no other feeling. And that’s what many owners choose to do, giving back to the next generation of entrepreneurs.
- Buying Something Nice.
This goes along with picking up a hobby they’ve neglected over the years. Many middle-market business owners can be found on YouTube watching videos on a yacht they’d like to buy or an exotic car. They’re researching real estate they could transfer some of their business proceeds to on a lake, the ocean or the mountains. Some owners want to buy a ranch and work the land, returning to their roots. Many look at this as a reward for a job well done, but I look at it as therapy for their minds. A new adventure to learn about and explore, while they have time to enjoy it. The outside world may view what the seller can afford as extravagant, but to the business owners we represent who achieve the American Dream selling their middle-market businesses, this is a small price to pay to enjoy what they’ve worked so hard to obtain.
- Buying or Starting Another Business.
The entrepreneurial spirit is a wonderful thing. It allows people from all walks of life to dream big, work hard and achieve their life’s ambitions. It’s what’s great about our country and the freedoms we protect, which allow anyone to follow this path if they’ll do what it takes to be successful.
When you sell your business, you have serious know-how and credibility, and you have the capital to invest in a business that needs help getting to the next level. The nice thing is that you don’t have to start something from scratch again. You can put on your buyer or investor hat for the first time and find a business you’d love to help grow and scale, working with the existing management team to take the company to the next level. The exciting thing is that you can sell this next company, too, getting another large sum of money for his or her efforts.
So, when is the best time to sell your business? As you can tell, there are many factors to consider when selling a business, each unique to the industry, the region of the country, the size of your business, and more. It’s important to carefully consider your options, and to align yourself with a strong team of exit advisors who can give you the right advice you need to make this decision. If you choose to sell your business, trust our team as it will always come up with the best exit strategy solutions. We talk with hundreds of business owners a year, and they almost always say they appreciated visiting with us because we explained things to them that “they never knew they never knew.” They also felt like we gave them clarity around the selling process so they could make an educated decision on selling their business. Give us a call if you have any questions or would like to learn more.
- About Us
Final Ascent LLC (https://finalacent.com) is a middle-market Mergers & Acquisitions (“M&A”) firm created to build a better exit path for its clients. Acting as the owner’s trusted exit authority, our advisors work with business owners across their entire exit journey, from preparing their businesses for sale so they’re exit ready and built to sell, to selling their business through a proprietary, proactive competitive bid sale process that generates multiple buyers, to preserving and enhancing the seller’s wealth through our sister company, Final Ascent Wealth Advisors, LLC (https://fawawealth.com). At Final Ascent, you’re not just a client, you’re family, and we welcome the opportunity to work with you and your family for many years to come. Final Ascent, Building Better Exits as Your Trusted Exit Authority