The ideal time to sell your business is when there are positive trends in revenue and earnings with the expectation of more to come. Growth is very influential in attaining a strong valuation multiple and, while valuation is technically determined by future prospects, historical performance is the most common way to get comfort with those prospects.
By historical performance we mean at least two to three years of consistent growth. Many businesses grow in steps. A pattern of revenues at $20 million for several years and then jumping to $25 million does not present a convincing growth trend. Another jump to $30 million the next year will go a long way to realizing a growth multiple. Ultimately, whether a buyer is convinced depends on how the growth was achieved and what the current prospects are.
Selling a Business takes Time
The process of selling a business is one that takes seven to ten months to complete and therefore you will always run into the question: “Are you on track to achieve your expected results?”..and “Can we have a look at the latest quarterly numbers?” To under-perform at this point would be a worst case scenario. If you are four to six months into the sale process, then you will have already received a number of expressions of interest and are likely working with a small group of seriously interested parties. A quarterly profit number below expectations will open up the possibility of a revision to the value/structure in an LOI and may cause serious delay in the process as an alternate buyer may need to be found.
Decide What is Most Important in the Outcome
The second most important consideration when you sell your business is who to sell to? We have written several posts about how to identify the best buyer but, as an overriding comment, we would say your M&A advisor needs to run a thorough and diligent sale process. The four phases of a divestiture are: plan, prepare, market and complete. A critical factor in achieving a successful sale is to keep as many options open as long as possible. The seller has power when he/she has choice.
Why Sell Your Business?
Finally, the why of selling is not a key driver from the perspective of realizing the most value in a transaction but it is a factor in the form of consideration and how long the process will take. Remember, if the business is dependent on the owner-operator, he/she will not be able to leave the business upon its sale. If the owner-operator has spent 20 years in the business, is nearing retirement, has made him/herself redundant, then he/she is in a position to structure the transaction to include as much cash as possible and make the transition period as short as possible. However, if the reason to sell part or all of the business is to take advantage of an opportunity to accelerate growth then, by partnering with a well capitalized entity that can bring investment, sales or distribution resources to the table, you may expect to spend many more years with the business. Finally, the best time to sell may have passed if the owner is no longer interested in the business (he/she is spending more time on other interests) or, he/she is compelled to sell for health reasons or changing competitive/technology dynamics that are substantially reducing the economic prospects for the business.
The sale process, from consideration to 100% out, can take many years and with economic uncertainty as it is, it is best to start the planning from a position of strength.