Is now the right time to sell your business or at least begin preparing to do so? After all, everybody exits sooner or later, one way or the other. But deciding to do so voluntarily is a complex process involving dozens of interrelated factors. It’s also one of the most important decisions an owner can make. This article breaks that complexity down into digestible morsels.
Of course advice on this matter isn’t hard to find. For instance, Forbes weighs in as does Inc. But while they and others set out useful general concepts to consider if you’re trying to decide, our approach is a great deal more granular and we present it in a time-saving bullet format to simplify the decision-making process.
So just read the items below and give a one-word response, Yes or No. The more you answer a certain way, the more likely you should either consider selling or alternatively, waiting for more favorable times. To find out which way the stars align for you, print this article out, grab a pen, and circle your answers. (Note: Some of the topics listed here will not be applicable to your circumstances: ignore those.)
A Yes to the Items Below May Argue for Selling Sooner Rather Than Later
- To reach the next stage of growth, you need access to more resources than you have. Say you’re teeing up a world-beating product but nobody knows about it and speed is important. Could a bigger company hit the market faster, penetrate it deeper, and do so at less risk to you? Alternatively, could an investor in your business inject the growth capital you need to move fast enough?
- Selling your company could fund an attractive lifestyle or allow you to invest in more interesting business opportunities elsewhere.
- Are you bringing less energy and joie de vivre to the job than you did before?
- Say tech or industry developments threaten your business model. Or say a large competitor with lower costs due to its scale is forcing you to reduce your asking prices. Or somebody found a way to work around your IP. Whatever the specifics, macroeconomic forces or your competitors are making life more difficult, probably for a long time.
- Buyers typically value companies with growing sales more than those with flat or declining sales. So ideally you want to exit before the rate of growth slows noticeably (which it will someday). Do you think your sales growth will start to decline in the next year or so but it’s not doing that yet?
- You’re uncomfortable with concentrating a large portion of your wealth in your business — too many eggs in one basket. And illiquid ones at that.
- You want to pass on a chunk of your wealth to family members.
- Demand for your company’s products or services is cyclic or faddish.
- You don’t like the direction of the economy, and/or current political or cultural trends.
- The “Buffett Indicator” may tell if a country’s stock market is over- or under-valued. It divides the total value of publicly-traded companies by quarterly Gross Domestic product (market cap/GDP). A “fairly priced” ratio is 1. The current US ratio is “significantly overvalued” at about 1.5. That’s the highest on record. Public company values and private company values are correlated. Do you think there’s a 50% or greater chance that your company’s value could decline within the next year?
- You’re done proving something. You can point to what you’ve accomplished with pride and feel that the company’s current and foreseeable challenges are less demanding or even mundane.
- There’s nobody in sight who has the interest or ability to succeed you as CEO.
- You’ve received an unsolicited offer to purchase your business.
- Your company’s products/services could fill a valuable gap in a larger competitor’s line-up.
- Your company owns IP that may be more valuable than its cash flow (NPV).
A No to the Items Below May Argue for Waiting Rather than Selling
- If sales have been flat or declining, can you — or do you know how to — fix the problem in a year or less?
- For older or brick-and-mortar businesses, buyers commonly use multiples of EBITDA to figure value. If you’ve been growing revenue rapidly and thereby driving your EBITDA/sales ratio down, do you expect a stronger ratio in the next year or two?
- Different industries go through different cycles of higher or lower M&A deal volume and average value per deal. If your industry is currently experiencing a down phase (which many now are), do you have the time, resources, and confidence to ride it out?
- In a related question, are you patient and young and/or healthy enough to weather a recession as long as five years?
- Do you have promising short-term and long-term projects for the company that you think will add value, and that you want to, and can, complete? For a list of such projects, see our blogs How to Increase Company Valuation: A Curb Appeal Checklist and How to Increase Company Valuation: A Renovation Checklist.
Deciding when’s the right time to sell your business is always an intensely personal decision. So personal that for some people, no matter how compelling certain facts may be, they will never sell or close up shop till eventually forced to do so, sometimes under less than fortunate circumstances.
There are many reasons for owners to feel this way: they don’t know what they’d do if they stopped working; or they don’t think anybody else can do a better job than them; or they like being the boss; or they can turn things around given more time; or they feel they can realize the full potential of the business without outside help. All these arguments may be correct and all are the right of any owner to make.
But sometimes they underestimate the value that new partners can contribute to their wealth and happiness. That’s often because as independent-minded entrepreneurs they may not have had much contact with peers, or they have not been exposed to sell-side deals that can in fact deliver to them much of what they desire after all.
At any rate, we hope this little quiz sparks some thinking about what to consider when deciding when or if to sell, or whether to sell entirely or partially. If you’d like to chat with us on creating some questions that would be unique to your business and circumstances, use our Contact form.