If you own a high performing company in a growth industry, now may be an ideal time to sell. The economy is booming, company values are up and investors have idle funds they need to put to work.
As the economy continues to recover, more middle-market business owners are thinking of selling their companies. Many have spent 20, 30 or more years creating and building a successful enterprise. They have lived through recessions, a technology revolution and a myriad of other challenges.
At the same time, certain market verticals are rife with young entrepreneurs who have rapidly grown their businesses and are also in the position to sell, needing either an influx of capital or strategic talent. Or they might just want to transition to a new endeavor, invest in a meaningful cause or simply sweep some chips off the table to enjoy the fruits of their labors.
Regardless of where you fall in the generational spectrum, these three questions are of foundational importance prior to initiating the sales process:
1. Why am I selling my business?
Whether you want to admit it or not, there is typically one overriding reason that has prompted your interest in selling. It can be good or bad, but you can be assured that buyers will always ask why the business owner wants to sell. It may be due to a change in your health or the health of a spouse or business partner. It could just be a great time to sell, or that you simply want to move on to your next project.
Many owners are not prepared for this question and the wrong answer can negatively impact the seller’s ability to close the deal or negotiate a desirable price and terms. While the veracity of your answer is paramount, of equal importance is your stamina and commitment to seeing your exit strategy through to successful completion. For example, if you answer, “I am just tired of managing the business and want to take a long vacation.” This type of answer, although understandable, makes buyers nervous. They may assume you have lost interest in the business or that your company is disorganized and needs more attention than you are willing to give it. All of these assumptions could impact the price and terms the buyer is willing to offer.
Before you begin the sales process, take time to clearly determine why you are interested in selling, and more important, what personal and financial objectives you hope to achieve through a sale. You should also clearly communicate these objectives to your investment banker to ensure the entire sales team is in sync with your wishes.
2. What is the best time to sell my business?
In life and in business, timing can be everything. While it may seem obvious that it is disadvantageous to sell when your business is suffering through a recessionary slump, it is also unwise to consider a sale when your business has peaked or has begun to decline. The ideal time to sell is when your business is performing well and is on an upward trend in revenue growth and profitability, the economy is strong and the future looks bright. This maximizes value and provides you the best leverage with potential buyers. Because buyers are investing in the future growth of the business, they need to see a pattern of growth with additional room to climb. Most investors prefer that owners remain with the company for some time to ensure a smooth transition and continuity of leadership with customers, employees and others. Therefore, selling when you are healthy and still highly capable of contributing to the ongoing success of the company can have a positive impact on the company’s valuation.
The state of the economy also affects company values. When the economy is growing and demand for products and services are high, the value of well managed companies is optimized. If the economy is crashing or in a slow recovery, company values can be flat or deflated.
The length of time it takes to sell should also be considered. Normally, it takes 9–12 months to sell a middle-market company, even in a strong economy. Owners should plan for this when developing a timeline for the potential sale. Timing is everything!
3. How is my business performing?
Buyers want to invest in winning companies that have great potential for future growth. They avoid purchasing companies that demonstrate declining sales or have legal issues or other problems. When it comes to how a business is performing, the company will typically fall into one of three categories:
- Growing and part of a growth industry.
- Experiencing solid growth in a sustainable industry.
- Declining in performance or part of an ailing industry.
Companies experiencing a decline in performance and that are part of an industry that is either dying or stagnant offer the least value to potential investors. Consequently, they will be worth less to potential buyers. Rapidly growing companies in high performing industries will be more valuable, because they offer the highest potential ROI for investors.
If you own a high performing company in a growth industry, now may be an ideal time to sell. The economy is booming, company values are up and investors have idle funds they need to put to work. The answer to “Why am I selling?” is, best expressed in your thoughtful responses to the questions posed above. Namely, “I am selling, because selling now not only fits with my planned exit strategy, but the timing is such that the market is cooperating, offering well positioned organizations such as mine higher multiples than at any other time in recent history.”