KEY ARTICLE TAKEAWAYS
Learn how to optimize the timing of the sale of your company by looking at personal, business and market considerations
Get best practices on when to start preparing for your exit
Understand the importance of early preparation to maximize your transaction results
When is the best time to sell my company?
You’ve spent a lifetime building your company, and are now starting to think about selling it – how do you determine the right time to sell? Timing your transaction well is more art than science, but there is a framework you can use to get the best results possible. Timing your transaction comes down to three factors:
- Personal timing. When is the right time for you personally?
- Business timing. When is the right time for the business?
- Market timing. When will the market be most cooperative to closing a great deal?
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Exit Checklist
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Personal timing
Personal timing is probably the easiest of the three factors to nail down. What is driving you to want to sell your company? Retirement, a new venture, illness, burnout or something else?
Understanding what a sale is going to make possible that is not possible today is critical for you to determine when to sell your company. You might also ask yourself if a sale is the best way to address your underlying desires, or could you simply hire a great team to make a more balanced life possible for yourself?
Because most transactions will benefit from (or require) the owner to stay on for some period of time if they are currently active in the business, the timing of your complete exit from the business will in many cases be 2-3 years (or more) after your sale.
Therefore, you should plan to consummate your sale a few years before you want to fully “retire” or move on. Staying on with the business post-close will make integration easier, will make your team less anxious about the transaction, and optimize the company’s chances for success after closing.
Some owners wait until they are burned out and almost “have” to sell. This is not a good strategy. Owners who are already exhausted typically have businesses that underperform businesses where the owner is enthusiastic and “in the game.” Buyers can see through any disguise that a business owner is burned out. This will cause them to question whether the business is really as attractive as you have represented (otherwise, why would you be burned out?).
Business timing
Some business owners seek to time the sale of their company when the company is hitting peak earnings, right before earnings start to slide (whether due to internal or external factors). Intuitively, this seems like a good idea, but it rarely works in practice.
For starters, it is really difficult to time a private sale transaction for precisely when earnings are at their highest (and heaven help you if your business starts to deteriorate in the middle of a sale process).
Second, if you care about your team, customers, and legacy, you should want the buyer to do even better with your business following a sale. When that happens, everyone is happy, potential litigation over the deal is unlikely, and your team can continue to flourish.
To maximize value and ensure the best odds of a successful transaction, the business will ideally have been growing revenues and profits nicely over the past two or three years (or longer), and will have a solid, defensible plan for predictable growth in the future.
In other words, you want to sell your business when it is still continuing to grow and is on the upswing. This will garner the best valuations, and maximize the chances for post-closing business success which is in everyone’s best interests, including yours.
If, following an acquisition, your business starts to immediately perform poorly, this will increase the odds of a dispute with the buyer, which could lead to litigation, trouble getting an escrow refunded to you, or trouble collecting on any earnout or contingent payments. It is in your best interests that the business (and your team) continue to perform well after closing.
Market timing
The trickiest part of planning a transaction is market timing. Unlike in public markets where a purchase or sale of equity can happen almost immediately, a private transaction can take 6 months or more to close from the date you “push go” and start your own sale process.
The market proved this to us once again in 2020: you could have started your transaction process in November of 2019 when the M&A markets were red hot and it appeared like the markets would be very receptive. You start putting your materials together, your banker is reaching out to bidders, you have some preliminary indications on the table and then March 2020 and COVID happen. Your process would come to a standstill, even though the market when you started was attractive.
Nonetheless, at least at the beginning of your process, you should be able to get a decent sense for where the market is by talking with your investment banker. If the market is tight, or lenders are not lending, it won’t make a lot of sense to start your process. If the market is hot, and lenders are eager to lend, then you can take some confidence that the market conditions are good to at least start your process.
When to start preparing to sell
One adage we use frequently in our offices is that “time kills deals.” This is particularly true in M&A. The longer your transaction takes, the more likely it is to fail. This is true for several reasons – buyers get bored, find something more attractive, or simply run out of steam.
The longer a transaction takes, the higher the odds of a snag in negotiations. Trust between the parties starts to erode, and little issues become big issues that can stall a deal.
As a result, when you go to market (and particularly when you sign a letter of intent with a buyer), you need to have first done significant preparation so that your business is prepared to speed through the rigors of due diligence.
Buyers today employ lawyers, accountants, consultants and others to help them conduct due diligence. For some of our transactions, we have seen buyers invest over $1-2 million in due diligence. Private equity and other buyers take diligence very seriously and do not want to be surprised post-closing.
As a result, if you are not prepared for their onslaught of requests, questions, follow up requests, and endless follow up questions, you will find yourself scrambling to respond, find documents, and explain discrepancies. As a result your transaction will be delayed and frustrations will mount on both sides.
The longer you take to respond to a buyer’s questions, the more skeptical they get, and they might then start to lose enthusiasm for the deal, jeopardizing your chances for a successful closing.
In short, once you decide you want to sell your business, you should plan to spend at least 3-4 months preparing for the transaction. However, in our experience, the business owners who started planning 2-3 years before they wanted to go to market ended up with the most successful transactions. The most money, the fastest time to closing, the easiest due diligence processes, etc.
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AUTHORED BY:
Bobby Motch | Associate | Class VI Securities, LLC
As an Associate at Class VI, Bobby has experience in transaction execution and board advisory services for clients in a variety of industries, including consumer products, food and beverage, business services, software-as-a-service, manufacturing, and distribution. Additionally, Bobby contributes to the development of Class VI’s CoPilot services and Class VI content creation.