Determining When to Sell

When is the Right Time to Sell Your Business? Internal & External Factors Can Help You Decide

By Tim Moore, an EO Houston member and managing partner, TR Moore & Company,
a Doeren Mayhew Firm.

One of the toughest decisions a business owner will ever make is to sell his or her company. Sometimes sales are forced, as in the event of financial distress, bankruptcy or an owner’s unplanned departure. But in most cases, owners must carefully assess their company’s financial and competitive position and determine the best time to sell, given their own future plans. Success — a smooth transaction, good terms and a fair price — largely depends on how well you’ve prepared for this important event.

Plan if You Can
Some owners are so financially and emotionally tied up in their businesses that they never retire. If this sounds like you, make sure you have detailed, comprehensive succession and estate plans. They can save your heirs and business partners major headaches and hefty tax bills. If you’re like most entrepreneurs, however, you plan to retire and either live off the proceeds of your business sale or possibly invest in a new venture. Both are good reasons for selling and are events for which you can plan years in advance.

Unfortunately, business sales aren’t always plannable events. Sometimes companies simply reach the end of their natural lifespan due to a changing marketplace, political or economic conditions, obsolete products or an inability to raise new capital. And owners caught up in the day-to-day running of the business may not recognize this dead end until they’ve hit the proverbial wall. So even if selling isn’t in your immediate plans, it’s wise to always consider it an option and plan accordingly.

Internal Considerations
If your business is in a growth rut, a partnership with a private equity group or an outright sale to another company may be what your business needs to flourish. Ask yourself:

  • Will the business be competitive in the long term under your ownership?
  • Do you have a strong enough appetite for risk to adequately grow it?
  • Are the current owners and managers skilled enough to take the business to the next level?

If the answer to such questions is “no,” you may be hindering your company’s growth.

Leadership conflicts can also trigger a sale. If a company’s two founding partners, for example, no longer agree on its long-term strategy, they should consider an ownership change. One partner could buy out the other partner’s shares, or both partners could sell the business to an outside buyer.

Outside Pressure
Internal factors play just part of the decision to sell a business, but you also need to consider:

  • The state of the capital markets
  • Interest rates
  • Credit availability
  • Industry-specific issues

For example, few deals were completed in early 2009 when market turbulence and frozen credit markets made it virtually impossible for buyers to complete merger and acquisition transactions. Although external factors are important, don’t make the mistake of trying to “time” your sale to the market — you may miss a good deal. Instead, start preparing your company well in advance of any planned sale so that it’s an attractive target, regardless of market conditions.

Weighing Your Strengths
Being prepared includes being aware of your strengths so you can identify the opportune time to consider a sell. Assess your company’s:

  • Industry and competition. Is your company the market leader in your industry or niche? Or are you consistently lagging your rivals in terms of sales and market share, with little hope of catching up?
  • Growth potential. Do you anticipate strong sales growth in the next few years? Are you able to improve customer relationships and land new or larger contracts, or expand into new territories? Or has your business saturated its industry and exhausted opportunities for expansion?
  • Lifecycle. Are your earnings forecasts fairly stable several years out? Or does your company expect a significant sales uptick in, say, two years? That could be an auspicious time to try to find a buyer.

Knowing your competitive placement and growth potential will help you position your company for sale when it’s most likely to attract potential buyers. For example, you may lead your market niche currently, but without a large capital infusion in the next year or two you will likely lose ground to competitors. A buyer with the right resources and knowledge could see your business as a great opportunity — if you go on the market now.

A business sale can be a long-planned-for event or a sudden necessity. Obviously, you’d prefer to sell when demand is strong and your company is healthy. But even when conditions seem less than ideal, your company’s destiny is in your hands if you’re always prepared to sell.

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