When Should I Sell My Business?
The short answer is when you plan to not when you’re forced to.
All businesses are either evolving, growing and innovating or dying. The only question is the timing.
I’ve worked with numerous clients that for various reasons decided to sell their business. With few exceptions, most were not in a position to get optimal valuation. It took some work to maximize their opportunities.
Let’s look at some facts about business valuations. A few years ago I read an article on the New York Times website entitled “Do You Really Expect Your Business to Get You Through Retirement?” The author presented a hypothetical sale as an illustration. I thought it was an excellent example. Let’s say your company is close to the following example:
Annual sales $10 million
EBITDA $1 million
Sales price or 4.5 times EBITDA $4.5 million
Taxes and expenses of sale 35% $1.757 million
Net proceeds from the sale $2.925 million
If that money was invested at 4 percent, it would provide a pretax annual income of about $117,000. Remember that you, as the owner, had been enjoying about $1 million in annual cash flow running a going concern.
The illustration above doesn’t consider debt. If your business had $1M in debt, the net would be reduced by approximately 30%.
Does that meet your transition requirements?
The time to begin thinking about transition is at least 3 years before the event. Five years is even better.
To maximize valuation and net proceeds your plan must include as a minimum.
Who do you want to sell it to?
There are several options.
· Sell it to employees, ESOP
· Sell it to a financial buyer
· Sell it to a strategic buyer where you add value to existing services
· Sell it to a large company to supplement something they don’t have
· Turn it over to family and create long-term income for yourself.
All of the above can create good outcomes, but all require different strategies to position the business for maximum valuations. The time to create that strategy is 3 to 5 years before you want it to occur.
What is a buyer looking for?
· A historical record of profitability and cash flow. I’d say a 3-year minimum.
· That the company can continue performance without the owner’s daily participation. (Infrastructure).
· Patents or other intellectual property
· Long-term relationships with excellent customers
· Great supplier relationships
· A strong value proposition
· Brand recognition or marketplace acceptance
I worked (briefly) with a client that said, “when I want to sell my business nobody wants to buy it”. He meant that when times were good, he enjoyed the cash flow. When times got tough, he wanted to sell it. That wasn’t a great strategy for maximizing valuation.
I always start with my client’s personal vision. Where do you want to be, and when? We determine clearly where they are today, and develop a plan to get them to where they want to be, and keep the business there?