Determining the optimal time to sell is a challenge faced by many entrepreneurs. There are three main factors to consider and balance when determining the best time to sell your business:
· Your personal goals
· The growth and financial performance of your business
· Economic conditions and demand in your industry
In an ideal world, and to obtain the best possible valuation, your personal interest in exiting or selling the business would come at a time when the business is growing quickly, and when conditions drive buyers to pay attractive valuations in your industry. This can definitely simplify your decision making -- and if this happens to you, consider starting the sales process immediately!
But, like many other aspects of life, these three factors might not all conveniently align at the same time.
For many entrepreneurs, their interest in a sale is greatest when the company has hit a plateau in growth, when additional investment is required to spur more growth, or when competition and the economy has changed the dynamics and profitability of the business. But these same issues reduce the attractiveness of the company and drive down valuation. Conversely, an owner’s interest in an exit is often lowest when the company is growing, and when the future looks bright. It’s natural to be concerned about leaving money on the table if the company continues to grow. But the company is generally of most interest to buyers in an upswing, and this is when the highest valuations can be obtained.
In addition to these considerations, other factors also add complexity to the timing decision:
· Buyer demand in the lower middle market is generally correlated with the overall health of the economy.
Demand from buyers during COVID has increased in some industries, and dropped in others. Consumer products, software and healthcare have all experienced an increase in demand from buyers, who are looking to put their money to work in sectors that are doing well.
· Retirement timing, family issues, health concerns, personal finances, burnout or other work or new business opportunities can all also drive the decision to sell, regardless of the current state of the business or the economy.
· Companies with more than one principal shareholder also face additional challenges in aligning the goals of all the shareholders or investors.
· Adding to the overall complexity, the process to sell can take up a to a year and the buyer may also want you to stay on for some length of time.
Deal structure and selecting the right buyer can overcome some concerns related to timing.
For example, if your company is growing, a partial sale to a private equity firm can allow you to diversify and take money out of the business, while also retaining some equity for a future sale and aligning yourself with a source of growth capital and an experienced team. Variable future compensation in the form of an earn out or commission or bonuses can also help you capture upside potential of the company while also entertaining an exit. Or if the company has hit a plateau, a sale to a strategic buyer already in your industry may provide additional scale and resources to help the company continue to grow.
We have helped many entrepreneurs work through decisions regarding timing. Some clients have made the decision to postpone a sale while they continued to build and develop the company, watched market conditions, and successfully sold several years later. Others have balanced all the issues, and decided to sell rather than wait.
But in all cases, the decision requires a careful consideration of your own personal goals, combined with a realistic and complete understanding of the valuation of your business, your growth projections, and all the risk factors associated with moving ahead or waiting.
If you are evaluating timing, we can help provide you with information to develop a solution that strikes the right balance in achieving your short- and long-term financial and personal goals. Email us for our detailed questionnaire to help you determine the optimal time to sell, or schedule a free call.
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