As the New Year arrives, business owners and entrepreneurs are looking ahead to the coming decade to see what’s next for their company; many may be considering a strategic alternative. For these individuals, the thought of selling the business is likely top of mind. However, owners often fail to take into account all factors that determine what their company is worth at any given point — potentially causing them to sell before (or after) their business has reached its maximal value.
It can be challenging to determine the right time to sell a business. Valuation is determined by a variety of factors, including market factors (availability and cost of capital), industry factors (competition and pricing, among others), and company-specific factors (typical examples being the focus here). However, paying close attention to the following concepts can help you find the ideal transaction window, giving you the best return for the many years of investment into your business.
Analyze your company’s historical revenue patterns
When you analyze your company’s history, focusing on its growth (or decline) over the years may help you notice a meaningful pattern. You might identify that revenue follows a seasonal pattern each year, or perhaps a more cyclical pattern over many years. Once you’ve analyzed the patterns of when your business has thrived, and when it has performed more modestly, you can better determine a course of action for timing the sale. If you’re able to forecast an upcoming growth period, you may find this an ideal time to sell as you’ll likely receive a higher value for your company’s forecasted performance.
How the industry is performing
Business owners are constantly keeping an eye on their industry to stay ahead of the competition and to stay in tune with current trends. However, monitoring the market can also be an ideal way to recognize a favorable time to sell your company. If you notice new competition popping up in your field, you could reasonably conclude that the demand for your company’s specific products or services is growing. This trend could signal an excellent time to start looking for acquirers that are interested in buying scale to enter the industry in a meaningful way; consolidation within your industry is a key indicator of a favorable selling environment. Even more importantly, it might be beneficial to exit the market before competition gets the better of your business.
Timing for financial performance
Generally speaking, completing a sale before a company’s year-end can reduce the likelihood of a deal being called off because of a revenue/profit ‘miss’ (in terms of full-year financial performance). The idea here is for the deal to close before full-year performance data is available. One thing to keep in mind — it takes an average of one to two quarters for a company to solicit and review offers, work through diligence, negotiate the legal documents, and close the deal — so make sure the process is started well enough in advance.
As the New Year arrives, it’s quite easy to overestimate how much your company is worth and underestimate the necessary preparation required to sell the business for the best possible value. To exit at the right time and for a healthy return, owners must begin planning well in advance of putting the company on the market. Making sure that all financial, tax, and commercial documents are in order, finding the right buyer, and organizing the deal team takes time. Even if your end goal may seem far off at the moment, there’s a long stretch of road ahead filled with preparation to ensure you’re positioned to sell when the right time comes. Make sure to avoid the mistake of not being prepared should a buyer come to you with an unsolicited offer.
As you can see, a variety of factors contribute to knowing when to market your company for a successful exit. It’s important to write down your objectives for what you seek in a transaction, first and foremost. Then, retaining experienced M&A consultants, such as Verdant Advisers, who understand the nuances around timing, and how to most effectively manage selling a business like yours will ensure you’re appropriately prepared for the process. An advisor with experience in your industry also helps make certain you get the most return for the company you have worked so hard to build.
Logan Laux, managing director and co-founder of Verdant Advisers, directs the M&A process for Verdant’s clients. He has developed extensive relationships with strategic and financial acquirers so that Verdant can find the right partners for their clients. He brings over a decade of capital markets and investing experience across dozens of industries. Logan is a Certified Merger and Acquisition Advisor, designated through the AM&AA. For more information, please visit www.verdantadvisers.com.