A friend of my son recently asked me an interesting question. He wanted to know when is the best time to get married. At 16 years old, I know he was just asking me one of those crazy questions that popped into his mind (at least I hope he was) so I quickly responded that you will know when the time is right to pop the question. And then I told him that he has a long time to worry about marriage and he should focus on things that are a lot more important in his life today such football and his studies.
This brief conversation got me thinking about the sale of businesses and when is the best time for an owner to sell.
Owners sell their business for a host of different reasons. Some sell because of personal reasons such as change in health or a death in the family. Others sell because market conditions are impacting the performance of their business. Some owners may no longer want to make the necessary investments into their business to remain competitive. Reasons behind a sale vary greatly from owner to owner and they don’t necessarily coincide with the ideal time-frame for an owner to sell the business.
When is the best time for an owner to sell his/her business? The short answer is whenever he/she could achieve maximum value for the business that is being sold. While some factors that drive a sale decision are completely outside of the owner’s control such as interest rates for acquisition financing, regulatory changes or even client behavior; a number important areas can be addressed at virtually any time to prepare a company for an eventual sale in any market.
Here is my short list of 5 key areas to focus on.
1. Is there still skin left on the bone? The buyers will want to see a clear growth path coming from existing clients, prospective client pipeline reports, new markets and/or additional service offerings. It is important to live by the old idiom “pigs get fat and hogs get slaughtered” when it comes time to sell your business. Buyers will be willing to pay a higher price or offer better deal terms for a business that is well positioned for growth instead of one that has already peaked out.
2. Sustainable bottom line performance. Is your business showing a track record of sustained profits over a multi-year period, or is it suffering from a series of profit peaks and valleys? The buyer’s return on their investment will come by generating profits so they will fixate on current as well as historical performance, and their belief that the business is well positioned to increase profits into the foreseeable future under their ownership.
3. Are key client engagements securely in place with low levels of concentration risk? Buyers will do everything they can to make sure the business they are buying will be in business long enough for them to realize a return on their investment. A major determinant of whether they pay cash at closing or seek to structure a buyout over time that shares risk with the seller is whether the buyer feels comfortable that key clients are in place for the long haul and that the business is not dependent upon one or a few that may walk after the owner sells. While client/vendor contracts may be terminated, key attributes such as tenure and competitive performance will influence a buyer’s decision on price and terms.
4. Who is steering the ship now? Before a sale is consummated, an owner can look at his/her business and decide whether key leadership is in place or as owners they are responsible for making the key decision that drives growth and profitability. If the answer lies behind door number 2, then the owner either needs to make the necessary investments to develop a strong leadership team or the owner must plan to stay with the business post sale.
5. Are capital investments consistently being made to ensure the company is positioned competitively now and into the future? Owners make decisions on a routine basis whether they are going to buy new systems, hire additional staff or open new offices to support current or anticipated growth. Decisions are also made to take the money out of the business in the form of distributions or excess salaries/owner benefits. Know that decisions like these will impact pricing when it comes time to sell the business.
How well positioned is your business for a sale? Please let me know if you would like to schedule a time to confidentially discuss this important topic?