When Is the Right Time to Sell Your Company?
Determining the right time to sell your company is never easy. The decision is usually based on the intersection of two components: 1) financial components (i.e., when does it make financial sense to sell?); and 2) personal components (i.e., am I ready to sell?)
From our research analyzing individual businesses using Orion’s propriety financial model that incorporates company performance, market conditions, general risk, taxes, and many other factors, we found that 55 percent of business owners were projected to have more money in 5 years by selling their business now than by selling their business 5 years from now. This means that for most business owners, there is a financial opportunity cost to owning their business, and these business owners are “paying” to go to work each day. Many business owners also felt they had excessive risk due to potential technology obsolescence, powerful new competitors, potential lawsuits, or the fact that a significant portion of their net worth was concentrated in their business, all of which factors play a part of the financial analysis that help business owners decide how long they should “hold” their business.
Building and analyzing a financial forecast that takes into account risk unique to your business, trends in the public market, and your personal goals can be a tremendously powerful tool. Calculating the opportunity cost to you of continuing to run your business helps you evaluate and prioritize your actions more accurately. In many cases, the opportunity cost may be higher than you realize. To evaluate your risk profile accurately you will need to, among other items:
- Understand the true market value of your company (i.e., what a buyer would be willing to pay today);
- Construct projected financials that are as realistic as possible (i.e., not the forecasts that you might typically present to your management teams or financial institutions);
- Understand how increasing tax rates might reduce your “take-home” by a significant amount; and
- Understand that any projected decrease in industry multiples will have more powerful effect on your company’s value than any projected increase in your company’s net income
Many business owners who carefully and accurately prepare the forecasts described above realized that cashing out and placing their money in the public markets was generally less risky than keeping the money in their own companies and less stressful than running their own company. If you would like access to our proprietary financial model and a demonstration on how to perform a similar analysis for your company, join one of our webinars.
Due to the fact that smaller businesses can take approximately one year to sell, timing is everything in maximizing value for your company. It's much easier to obtain more interest from buyers when you are growing rather than when you are plateauing or even declining. Unfortunately, most business owners wait until the latter before selling their business.
Our analysis shows that M&A valuation multiples have distinct cycles that are typically last between 35 and 40 years. Currently, we are in the downward part of that cycle and we believe valuation multiples won’t return to the present levels for approximately 20 years. This downward trend, coupled with the fact that the number of retiring baby boomers could further reduce valuation multiples, might mean that your company could be one of the 55 percent for which it would make financial sense to sell now.
In order to be personally ready, you should know what you want to do if you are not running your business and you must have fully “bought in” to that idea. Generally, in order to be ready to exit, one of the following usually applies:
- You need or want to retire soon;
- You are burned out;
- Your business needs cash to grow and you don’t want to contribute more money;
- You aren't getting along with your business partners;
- Your family doesn't get to see you enough; or
- You are ready to start a new venture.
Sometimes it takes a few years to know and develop your life after you sell and that is why personal development is always a component of a good exit plan. It is also important to remember that it does take approximately one year to sell the business and the buyer will usually want you to remain with the company for one to two years after the acquisition. Ideally, it’s best to start the planning process approximately three years before you anticipate one of the above happening in order to maximize the value of your company.