Why business owners may not recognize the right time to sell

A profitable business exit depends on more than your readiness

Nov 20, 2023

Key takeaways

Traits that make a business owner successful may, ironically, undermine their success exiting.

Disregarding economic and marketplace factors may result in a mistimed, unsuccessful exit.

Investment bankers can be an invaluable source of insights about sale conditions and timing.

Most privately held businesses have been or will be sold. There are exceptions, of course—failed businesses that shutter, enterprises that transition to family members and the rare case of a company that goes public. However, the norm requires most business owners to have a sound strategy to sell to a third party.

But when in the life of your business is the best time to sell?

The answer depends on internal and external factors. Unfortunately, many owners emphasize only internal factors. This internal focus fuels business growth but, ironically, may serve as an obstacle to a fruitful outcome.  

Indeed, many successful business owners seem to have certain attributes in common:

  • Their singular passion is to improve operations of the enterprise.
  • Their personal self-worth is intertwined with that of their company.
  • They have minimal interests outside of the business.
  • They would be lost without the purpose of leading the enterprise they have dedicated their professional life to building.
  • All their work time is focused within the business rather than looking externally to assess the environment in which the business operates today and will in the future.

Those characteristics elevate their respective businesses. But the success of an exit event depends largely on whether the business is attractive to potential buyers. And the timing of that can be unpredictable.

Understanding from the start that businesses are created to be sold will help you establish and pursue your end goals and prepare for a successful business sale.

The ins and outs of timing

Too often, business owners start to think about monetizing their business equity when they feel personally ready. Maybe they just don’t wish to continue working, or they have suffered an illness. Sometimes they realize they have become stale and the business would be better served in the hands of others. Many never come to a point of personal readiness to exit.

Unfortunately, your readiness does not necessarily correspond to the best time to extract value from the business. Value, to a large extent, depends on the buyer’s assessment and perception.

Most buyers want to be confident that a business has created:

  • Reliable and sustainable free cash flow
  • Efficient and effective infrastructure
  • Strong management that will perpetuate once the owners are removed
  • Valued and differentiated products or services
  • Unique strategic positioning

Obviously, the bigger and better these attributes are, the more valuable an enterprise should be. Fortunately, these are internal factors over which you have significant control. It’s no wonder that owners are more likely to address these in order to consummate a positive exit.

However, external factors can be equally important. Here are critical ones to consider:

Economic climate: Multiples of earnings or revenue for which companies are sold directly correlate to the general economy. The volume and the value of transactions tend to fall as economic conditions falter. Acquisitive companies will often retrench and try to maintain funds to address problematic financial results.

Not only do values tend to follow the economy, but the anticipation of a recession suppresses overall values as former acquirers try to get ahead of a downturn. These macro factors can materially influence the best time to sell.

View of the industry: Multiples of earnings or revenue can vary widely by industry, and those multiples can fluctuate within an industry over time. How economists and securities analysts perceive where an industry resides in its life cycle generally affects market value.

For instance, are experts anticipating significant industry growth, or is an industry becoming commoditized? Their viewpoints can cause certain industries to go in and out of favor, causing access to capital to ease or tighten for acquirers.

More capital drives up multiples because demand increases. There is a ripple effect from all of this to middle market companies, and owners need to be aware of these industry trends.

Potential market disturbances: Technology, competition or regulation can reshape a business landscape faster than some businesses can keep up. Many of these sorts of transformational disturbances feel as though they’re a long way off, but they are certain to influence company values in the future.

It is a daunting challenge to understand the future state and how new dynamics will shape your business environment. But it is crucial to be adaptable, stay in front of change and realize that an early exit may preserve company value.

How to account for the external factors

Much of what is outside a business owner’s immediate control can materially affect a financially successful exit. Being savvy about such factors should influence your timing for this important event. You can be proactive by educating yourself.

Here are three ways you can evaluate external factors when considering when to sell:

  1. Develop relationships with investment bankers who understand your industry and geography. They know if acquirers have an abundance of available money, and they have a sense of supply and demand for companies in the industry.
  2. Periodically engage a credentialed business valuation specialist to conduct a fair market value analysis. This can provide not only insights into the critical value drivers of your business and a benchmark value for the business, but also a great deal of information about the market’s appetite and recent trends for acquisitions in your specific industry.
  3. Become a continuous learner about the world around you. There is a plethora of articles, books, seminars and videos about the future state, business trends, how technology will change our lives, emerging economies, potential tax law changes, movements in available private equity and corporate cash, international trade, etc. Take advantage of these resources.

It may seem daunting to stay updated on all the external factors affecting your business’s value, especially when internal factors command your attention. But too many business owners pay little attention to these subjects, when insights on such matters have an indelible strategic effect on every business.

Overall, exiting your business is not just about when you are personally ready, or when you believe the business is ready. You need to understand what drives market conditions and when the market conditions are most favorable. Not doing so could lead to a suboptimal and disappointing business divestiture.

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