When is the right time to sell your business

                           When is the Right Time To Sell Your Business ?

                                                By Mark Sievers

                  In a recent article I wrote about how to  get the most of the sale of a business .   This a  companion piece about “ when is the right time to sell your business ?” .    There is no magic answer to that question but there are several factors to contemplate .   This article will attempt to shed light and perspective on these factors but they generally fall into the two categories of business and personal  with some overlap .

Business Considerations  

                First and foremost it is always a good idea to sell before you have to or need to .   If there are potential looming health, personal , competitive , regulatory or other reasons it is often  advisable to sell before these become issues because if you wait you may not have the luxury of being patient in the selling process therefore you may lose negotiating leverage .

               It is also useful to understand where your business is in terms of a business lifecycle  .    Typical lifecycle stages of a business include the following :

1. Start-up

2. Early Stage

3. Rapid Growth

4. Maturity

5. Declining

           Any business can be sold at any stage but each stage creates nuances and dynamics of the valuation and sale process .    Typically , businesses are sold at the maturity stage .   These are usually attractive acquisition candidates because of solid business history which reduces perceived risk and makes the business purchase an easier deal to get done because it’s a better fit for traditional bank financing .    Often it’s a  situation is where someone started the business years or even decades  ago and is ready to retire . 

          A business in the declining stage will be harder to sell and will have obvious downward pressure on valuation due to the earnings trend.   However, it could still be a nice acquisition candidate for someone who is a turnaround specialist or is in a related business that can bring synergy to a new combined enterprise . 

          Businesses in a start-up or early growth stage are harder to sell because you are selling “potential “ and not actual results .    If these businesses have significant intellectual property ( IP ) then the valuation argument can be enhanced .    A useful acquisition approach on these types of businesses includes a royalty or earn out approach where if the new owner brings the potential to fruition the seller shares in the upside .    How these gets measured and funded is a subject for a whole different article but I will the technique  will need to strike a balance between being too complicated and overly simple .       

        Businesses in the rapid growth stage can be very attractive acquisition candidates and will often command higher earnings multiples due to the growth curve .    However, in order to keep the business on a growth path the buyer may need extended assistance from the seller in the form of continuing involvement as part of the management team or a consulting arrangement .    The term of that involvement may be restricted if the buyer is using tradition bank financing in the form of an SBA loan .    

          If the business is a partnership then the decision to sell can become more complicated .    It is very important that both or all partners be in agreement about a sale and a valuation range before starting the process .               

         Another factor that can come into play are tax and financial planning issues .   If , for some reason, it might be more favorable to sell in the current year rather than a succeeding year then the sale process should be started as soon as prudent .     

         The seller (and key partners if any ) also should be prepared to thoughtfully embrace the sale process .    This will include complying with buyer due diligence , negotiations and using the right team of professional to assist the process  .   

 Personal Considerations        

           If you are a business owner considering a sale for the right business reasons then you need to think through if you are mentally ready to sell .      For many business owners this can be easy if they are “burnt out “ or just know “its time”  .    I was involved in a business sale last year and after the closing I asked the seller how he felt , etc..  He responded by saying “ Well,  for the first time in 42 years I can now take Saturday off “  .     It also allowed him the flexibility to travel and spend more time with grandchildren .     For others it can be a new opportunity to “ scratch that itch” and go back to school  , be a volunteer , or pursue a hobby  .   

           However, for some it can also be a challenging transition .    Being a small business owner becomes part of your identity and defines how you think of yourself and possibly how others think of you .    Without thinking this through a seller can feel a little lost after the sale .   Your business life and your social life become intertwined over the course of decades so “letting go” can be difficult .    Therefore,  thinking though that next stage in their life is important.   I know of someone who , when faced with this ,  said she was looking at the business sale not as a finish line but a starting lining in a new chapter of her life . 

            Another personal consideration is the impact on the family.  This is particularly important if family members are involved in the business .    The impact of a business sale on all family members needs to be thought through .   Some family members with have that same sense of identity with the business that the owner does .     That can be especially true if the business name includes the family name .  

           The financial impact of a business sale on the seller and his family should also be understood.   In addition to the loss of salary and dividends taken from the business there can be the loss of perks from the business ( certain expenses , travel, etc. ) .    

          In summary a seller has to understand a combination of factors when deciding to sell.   This includes not waiting too long  , the pricing implications of the business stage life cycle ,  partnership or shareholder dynamics , and being psychologically prepared to embrace the sale process  and life afterward .   And finally , another way to look at it is to consider the opportunity cost of not selling in terms of other opportunities , pursuits  and life goals .  This perspective should help clarify the thinking in this decision .

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Published in the Kentucky Business Quarterly in 2016