timing, timing, timing.
This somewhat analogous framework relates to a critical aspect of when to sell a business. We can discuss the different reasons why a business owner would need to sell the business for many pages, but in the interest of brevity let’s discuss one of the most important factors in the sale of a business – the timing.
When I finally decided that it was time to sell my ownership in a thriving, well-recognized, award-winning software services company, the timing could not have been better. For one thing, there were plenty of publicly-held corporate buyers with “deep pockets” that had voracious appetites to establish a presence in the Midwest. They were looking for an acquisition platform to obtain market share and establish their footprint in the market. Being recognized as one Microsoft’s Top 10 companies in the Great Lakes Region with the branding and respectable client-base of Fortune 500 companies, we were an ideal acquisition target.
While the timing was ideal, my knowledge of the business sale process was what I would now consider deficient. I was adept at running the company, focused in the management of company resources both on the human resource and financial sides, but I lacked the knowledge that it was actually an ideal time to sell the business. Unfortunately, the advisors I eventually hired to assist with the sale of the company missed the mark by not providing me the comprehensive education and information to make a wise decision on the sale. Due to this, I missed the timing which would have allowed me to sell at an optimal price. The whole process took more than 3 years and ended painfully. I walked away with only 17% of what I would have received if I had given thought to the importance of timing.
As painful as it was, I would say today that one of the greatest values of this experience was learning to provide guidance and information for other business owners and help them understand this key notion of “timing.”
There are many factors that business owners should consider when it comes to the optimal sale and exit from the business. Such factors are:
Economic Climate: Is the current economy a limiting factor to making your business attractive to a business buyer? One might think that a less than favorable economic climate would deter business buyers from considering acquisitions – nothing could be farther from the truth. A good and well-run business regardless of the economy will be appealing to business buyers. If you are well-positioned in a certain market, realistic in price, and have flexibility with regard to terms then business buyers will flock to do a deal. Given this, you still need to have an understanding of how the previous economy treated your business in the past and how it treats your business today. An understanding this will allow you to effectively communicate to the new owner how the future economy may affect the company moving forward.
Demographic Trend: You hear it again and again: the “boomer factor.” 10,000 people in the US turn 60 each day in 2011. A good portion them are owners of privately-held businesses who have contemplated the sales of their businesses in order to retire or change the pace of their lives. As more boomers consider exiting their businesses there will be increase in the supply of businesses for sale and we all know what abundant supply does to pricing. It may provide for lower valuations and once again affect the overall “take home” pay.
Tax Provisions: What type of tax treatment will you face when it comes to the sale of the business? How will the current tax rates affect your overall “take home” pay from the sale of your business? During President Bush’s administration several time-limited, corporate-friendly tax laws were enacted. These changes provided a serious look into the timing of the sale of a business as it provided favorable terms for the business owner.
Industry Trend: You have to look to the past, the present, and the future of your industry. What cyclical attributes does your industry currently have? What are the trends of your business or service? With the proliferation of web and internet resources, obtaining such peripheral market data is easily attainable – research them every quarter. A good business owner will want to understand these trends. A good example of this is how the social media craze can increase or decrease the value proposition of your business.
Availability of Financing and Credit: What type of banking and credit climate will you be experiencing? Most small business owners were not prepared for the banking crisis in 2008. That alone reverberated in the small business community and halted some transactions. Generally business buyers don’t have $ 300,000 in cash just sitting in an account ready to do a deal. Most business sales are facilitated through the Small Business Administration’s (SBA) loan programs and other financing and credit facilities that, depending on the lending climate, may be unfavorable for putting together business deals. Another thing to think about is if you will need credit so you can obtain another piece of machinery or equipment that will take you to the top and make your business more attractive.
Product or Service Obsolescence: Where is your business when it comes to the demand of your service or product? Will advancement in technology affect the lifecycle of your business? Will the resources or supply from the global market influence your business? I’ve seen it happen with my former company when outsourcing software development became a main stream endeavor for my enterprise clients. It affected my pricing guidelines which had to be more competitive. How would such an opportunity for your customers affect your overall viability as a business?
Burn Out Factor: You’ve been doing the same thing over and over again. Would you have the staying power to keep it up until the company sells or are you burned out of your wits to the point where you can’t have an ongoing fresh outlook and effectively operate the business. The Burn-Out Factor could interfere with a smooth exit by hindering you from making critical decisions that take the company to the next level. I experienced this myself with my previous company because I “rode it hard.” I put in so many hours and so much effort to take the company to a certain level in just a few short years, but the Burn-Out Factor eventually got to me. I was concerned that the apathetic approach to winning additional corporate accounts to me meant additional employees, overhead, and work.
Drawing from my own experience of being on the other side of the table, I meet with business owners with this question in mind: will they know if this is the right time to exit from or sell the business?
As an entrepreneur and business owner you took on the gamble to embark on your business. Just like in Kenny Rogers’ old song, The Gambler “You got to know when to hold ‘em, know when to fold ‘em, Know when to walk away and know when to run…”
Timing is a highly critical element in the exit from and sale of the business – know when to consider it.
