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When is the Right Time to Sell Your Company?

by markheitner

Most business owners have a thought in back of their minds that
they will at some point (hopefully), sell their business for lots
of money. Who can blame them? After all, isn't this part of the
allure of getting into your own business?

While there are drastic differences between selling a business
and a piece of property, there are certain common fundamentals
with "market timing" being the most critical. The good news is
that unlike real estate when there are cycles of seller and buyer
markets, the supply/demand curve in business sales ALWAYS favors
the seller. Let me explain: On the buy side, there are always
tons of people looking to buy a business; most never do. On the
sell side, most businesses listed for sale, never sell. However;
there is ALWAYS a shortage of "good" businesses. In fact, when a
"good" business hits the market, it can be under contract within
days.

Now that you know you can always find a buyer for a good
business, let's get back to when it's the best time to sell.

When Business Is Good...

Undoubtedly, the best to sell is when the business is at, or
near its peak of revenue and profitability in its recent history
with a few solid prior years of growth. This does not mean you
think it's at the top and will decline. The peak simply indicates
that it is on an upward trend compared to prior years. Or, you
feel that you have taken the business as far as you are capable
of doing and someone else either with new, or different skills,
can take it to the "next level". Think of it this way: if the
business were an athlete, when would be the best time to be
eligible for free agency? Right after a "career year" right? The
same holds true for a business. The best time to sell are when
things are going well. You'll get a higher price, better terms,
and a quicker sale (on this note, you may be interested to learn
that the average business takes 7-8 months to sell). Trying to
sell a declining business is simply more challenging for everyone
on the sell side.

While it would be ideal to sell when the business is on a high
note, it is even better if the business has demonstrated several
years of stable revenues/profits is also considered an excellent
time to bring it to market. Keep in mind that one of the greatest
unknowns to a buyer is whether the business will transition to
them and continue as it was before. Having the ability to show
them several prior years of stability will go a long way in
soothing their worries.

What If The Business Is Not Doing Well?

There can be reasons beyond your control that force you to sell
a business when things are not going well. In these cases, you
need to do what you can to get the best deal possible. If getting
out is the most important thing, then you'll want to do the
following:

* Address any immediate problems with the business. Without
being reckless, decide what may be the one or two biggest
issues/negatives that a prospective buyer may identify in the
business. Then, do whatever you can do either repair it, or to
lessen the severity of the problem.

* Write up a detailed and realistic business plan that you can
present to prospective buyers that outlines exactly what you
would do over the next one to three years if you were not
"forced" to sell. By laying this out in a realistic and logical
fashion, a buyer will be able to see that he can execute the
plan. Above all, be realistic. This is not the time to be
delusional. This plan may ultimately be your biggest sales tool.

* Be open to a deal that may involve a larger than usual seller
note, or earnout/performance based term whereby you can get a
higher price based upon the future, short-term performance of the
business.

What Buyer's Want and Need

The reason why people will buy existing businesses (often paying
a premium) versus starting one from scratch is because there are
some known factors that can mitigate their risk such as:

*   Immediate cash flow
*   Built in infrastructure
*   Historical financial data
*   Customer base
*   No start up hiccups

Given this, business buyers will pay a premium for business
where revenues and profits are trending up, or, at the very
least, are stable. Most people do not have the experience to turn
around a declining business, especially when they haven't done so
before. The typical small business buyer mentality is: "takeover
on Monday, collect a paycheck on Friday" (a bit of an
exaggeration, but not much). Plus, it is far easier to finance
the purchase of a growing business than a declining one. This is
certainly true when government loan programs are in place that
may use the worst of the last 2-3 year's of tax returns as a
basis for the business to service the debt.

Warning: Leave Some Juice in the Fruit not Cash on the Table

It can be very tempting to keep hammering away at the business
when things are going well. You've worked hard, the fruits of
your labor are paying off, the systems are in place, and you have
a solid comfort with what you do each day. These are all rational
thoughts. Also, when a business has experienced some ups and
downs, it seems almost crazy to consider selling when things are
consistently good. Yes, it may seem hard, you make hay when the
sun shines so be opportunistic and sell it when you think it is
at, or near the high.

A buyer must be able to see that the business has a very viable
future with them as the new owner. You need to have the business
operating well, with a bright outlook. You may find yourself in a
situation where new business is coming in or there are some
lucrative contracts pending. It would be easy to convince
yourself to postpone the sale and benefit from these revenues.
However, these are precisely the situations that buyers want to
see, and have in place when they take over. Although these could
trigger an "earnout" or performance type deal, nevertheless,
providing a bright future for a buyer is very enticing to getting
a deal done; which is ultimately the entire objective of this
exercise.

While there is always a market for good businesses, the amount
of money and deal terms you could benefit from when the business
is doing well, is staggering compared to selling a declining one.
I like to compare it to the toy business that I was involved with
about ten years ago. We sold licensed or themed merchandise. When
the license was "hot", my dog could have gone to the major
retailers and walked out with orders, but when a license's
popularity dies, I couldn't give the product away. It could have
been easy to get caught with a warehouse full of inventory that
could wipe out all the profits we generated when it was popular.
So, my partner and I decided that once a license hit its peak (at
least in our estimation) we would be "sold out". No more
inventory. Sure we missed out a bit of profit in one or two
licenses but we never had to liquidate product and wipe out all
the prior profits. In all, we made a lot of money.

The same holds true for a business. Sell when it's doing well.
Better yet, sell it when it is doing great. It is much easier to
convince any buyer to pay a premium when the business is thriving
versus trying to even find a buyer when the business is in
decline. Moreover, with the number of buyers, and the shortages
of good businesses, you may wind up having several interested
parties "bidding" on your business since there's always a
shortage of good businesses on the market.

Mark Heitner, MD, MBA, the founder of <a
href="http://www.midmex.com">MidMEx</a>, is a psychiatrist,
author and software developer. Many patients have been owners of
mid-sized companies with a <a
href="http://www.midmex.com">business for sale</a>. MidMEx helps
sellers by creating a supportive community of verified buyers and
expert business appraisers, brokers and attorneys. Many resources
are available to help owners <a href="http://www.midmex.com">sell
the business</a>.

Syndicated by Top Gazebos - www.topgazebos.net

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