Multiples May Not Dictate the Right Time to Sell a Company
Most entrepreneurs reject a suggestion to sell by saying “it’s not the right time”. They assume the best time to sell is when market multiples are at their peak; but does it make sense to try and time the market?
Capital markets are significantly correlated. So if you sell at a high value, you will pay more taxes and diversify your proceeds in high priced securities (because the price/multiples on other investments will also be high). This will hurt your returns going forward.
If you sell at the low part of the market and reinvest in low priced securities you may end up in the same place or a better one than if you’d sold at the top of the market. For these reasons, portfolio theory says the only way to create value is through diversification. Is the entrepreneur losing anything by trying to time the market? Of course!
The entrepreneur is: incurring more risk with a concentrated portfolio; losing the value created by a diversified portfolio; potentially losing value by holding on to an asset that is under-performing the market; and incurring the opportunity cost of not using the most valuable human skill (see “The Most Valuable Skill in the World”).
Does this mean it’s always the right time? No, it means there are other factors that are more important to determining if it is the right time. If asked, we suggest that an entrepreneur consider a sale when his company is not increasing its market share (see “Declining Market Share Indicates Good Time to Sell Your Company)…regardless of current multiples.