When is the right time to sell my company?
Most business owners want to know when is the best time to sell their business. In this article, we’ll discuss how to forecast general market conditions and trends in your industry and how to use business and personal expectations to determine the best time to sell.
When you invest in the stock market, your adviser will tell you not to “time” the market, as you should invest with an eye toward long-term returns. Some listen to that advice but many don’t because most people know that timing can be everything. When one of your shares doubles in a week, it’s hard to sell it because you assume it will continue to do so. As we all saw a couple of years ago, the market could do the exact opposite and in 2007 many people lost substantial amounts of money, in some cases the majority of their net worth. While the verdict may be on the benefits of timing the stock market, there is no doubt that timing is incredibly important in selling your business for several reasons:
- Most business owners have a significant concentration of their net worth in their business.
- Business finance and value will typically fluctuate more than GDP or the stock market.
- Most companies are vulnerable to large fluctuations in value caused by the death of key shareholders, litigation, loss of a major contract, or other reasons.
- Also, because it can take 8-12 months to find a buyer for smaller companies and close the transaction, time is much more critical than investing in the stock market, where stocks are highly liquid and can be sold in minutes. with only nominal transaction costs. Additionally, business owners should anticipate where their business will be 8-12 months from any given date, because financial and market conditions 8-12 months from the date the business owner starts the sales process generally dictate how much the business owner can earn. make the sale of your business.
Let’s look at the first variable: what will your finances look like in 8-12 months? Buyers are notorious for trying to slash the price of their business before closing if its revenue or EBITDA falls. Second, if you have provided the buyer with the expected financials and they are away from the first year goal after 8-12 months, they may decide to lower the price before closing. Don’t fall into the trap of thinking that once you’ve closed on last year’s finances and have an acceptable letter of intent from a buyer, you’ll close on the terms agreed to at the beginning of the deal. Therefore, from your company’s financial position, commit to the sale at a time 8-12 months BEFORE when you think revenue and EBITDA will be higher than they are now.
Now let’s look at market conditions. While the stock market can be a good indicator of market trends, you still need to consider the fact that market conditions at the time of the close are often the most important indicators because they give buyers another opportunity to reassess whether their company is still a good opportunity. . Public stock valuations and general M&A trends aren’t a good enough indicator of what’s going on in your industry or for deals similar in size to yours, so don’t rely entirely on such indicators. It’s important to look at the statistics that are relevant to your business, determine which variables are driving the trends, and make an educated guess about what’s going to happen next.
Here are some market forces to consider and our guess as to how they will affect different market sizes:
- Will capital gains tax increases in 2011 cause people to sell shares in public companies and thus cause a subsequent market/valuation decline in public companies later this year? Probably. This drop in prices could subsequently provoke a wave of purchases of public companies by other public companies. Will the increase in capital gains cause a drop in the valuation of private companies later this year? Probably not. Here, the 8-12 month lead time required to close a deal may be an advantage, as there is unlikely to be a rush of private companies beginning the sale process later this year for purely fiscal reasons.
- If inflation hits, the trend is generally a negative hit to stock valuations of companies large and small because interest rates rise and make bonds more attractive to investors.
- If roughly 70% of private companies want to sell in the next 10 years as many expect due to the retirement of the baby boomer population, will that affect private company valuations? your bet Will it affect public companies? A lot less.
- During the recession, both private equity groups and strategic buyers tended to favor smaller companies. With both strategic buyers and private equity groups holding record amounts of cash, the size of the acquisitions they will want to make will increase, making larger companies more attractive again.
- When looking at various industries, it is important to consider how they are affected in relation to the stock market and the economy. Here are some takeaways by industry:
- In 2009, the total value of health and consumer staples deals (less than $500 million) made in North America was significantly higher than any other year in the past five years. Why? Because those are the industries that everyone turns to when the economy is bad. In 2010, middle-market companies in those industries have not been as attractive
- 2007 was by far the best year in the last five years for consumer discretionary, utilities and information technology deals (less than $500 million). 2009 was the worst year for all three industries. These industries tend to mirror the stock market in general.
- The total value of industrial and manufacturing transactions reached its lowest point in 2009 and has now recovered in an upward trend to be even higher than in 2006!
- Energy and materials companies tend to follow their respective market trends.
Is now a good time? For small businesses in many industries, now is a great time. We are at an inflection point where deal sizes will start to increase, there will be a greater supply of small and medium-sized sellers in the coming years, and right now, for many industries, valuation multiples are good.
