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When is the right time to sell my business?

Most business owners want to know when is the best time to sell their business. In this article, we will discuss how to forecast general market trends and conditions 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 advisor will tell you not to “time” the market, as you must invest with a view to 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 you’ll continue down that path. As we all saw a couple of years ago, the market could easily do the opposite and in 2007 many people lost substantial amounts of money, in some cases most of their net worth. While the verdict may be on the benefits of scheduling the stock market, there is no question 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 businesses.
• Business finance and value will typically fluctuate more than GDP or the stock market.
• Most companies are vulnerable to huge fluctuations in value caused by the death of key shareholders, litigation, loss of an important contract, or various other reasons.
• Also, because it can take 8 to 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 between 8 and 12 months from a certain date, because financial and market conditions between 8 and 12 months from the date the business owner begins the business. Sales process usually dictate the position of the business owner. make from the sale of your business.

Let’s look at the first variable: what will your finances be like in 8-12 months? Buyers are notorious for trying to lower the price of your business before closing if your revenue or EBITDA drops. Second, if you provided the buyer with the expected financial data and you are far from the first year target after 8 to 12 months, they may decide to lower the price before closing. Don’t fall into the trap of thinking once you’ve closed last year’s finances and have an acceptable letter of intent from a buyer that you’re closing on the terms agreed upon at the beginning of the deal. So from your company’s financial position, commit to the sale 8-12 months BEFORE you think revenue and EBITDA will be higher than they are now.

Now let’s look at the market conditions. While the stock market can be a good indicator of market trends, you should still consider the fact that market conditions at the time of closing 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 are not a good enough indicator to determine what is happening in your industry or for deals of similar size to yours, so don’t completely rely on such indicators. It’s important to look at the statistics that are relevant to your business, determine what variables are driving trends, and make an intelligent guess about what’s going to happen.

Here are some market forces to consider and our guess on how they will affect different market sizes:

• Will the capital gains tax increases in 2011 cause people to sell shares in public companies and thus cause a subsequent drop in the market / valuation of public companies later this year? Probably. This drop in prices could subsequently trigger a wave of purchases of public companies by other public companies. Will the rise in capital gains cause a drop in the valuation of private companies later this year? Probably not. In this case, the 8-12 month lead time required to close a deal can be an advantage, as it is unlikely that there will be a flood of private companies starting the sale process by the end of this year for purely fiscal reasons. .
• If inflation hits, in general, the trend is a negative blow to the valuations of stocks of large and small companies because interest rates rise and make bonds more attractive to investors.
• If approximately 70% of private companies want to sell in the next 10 years as many expect due to the retirement of the baby boomers population, will it affect the valuations of private companies? You gamble. Will it affect public companies? A lot less.
• During the recession, both private equity groups and strategic buyers tended to favor smaller companies. Since both strategic buyers and private equity groups have 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 relative to the stock market and the economy. Here are some takeaways by industry:

• In 2009, the total value of healthcare and consumer commodity deals (less than $ 500 million) made in North America was significantly higher than in any other year in the past five years. Why? Because those are the industries that everyone runs to when the economy goes bad. In 2010, middle market companies in those industries have not been as attractive
• 2007 was by far the best year in the past 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 the industrial and manufacturing operation touched 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.

Now is a good time? For small businesses in many industries, now is a good time. We are at an inflection point where transaction sizes will start to increase, there will be a greater supply of small and medium-sized sellers in the next few years, and right now, for many industries, valuation multiples are good.