Many of my clients ask me advice about the right time to sell their business. And, I’m glad that they are asking this question because many business owners get it wrong. The tendency when a business is growing (i.e., the hockey stick) is to focus solely on the growth mindset. The thought to sell your business is in the distant future because the company is doing well, growing, and capturing market share. However, this is precisely the time that you should be thinking about M&A.
The best time to sell your business is actually when it is doing great.
Why should a business be thinking about M&A when they are doing great? That is precisely the time that the company has strength and is showing an upward trajectory. It is also a good time to be developing strategic partners that could, one day, be the company’s acquirer. Selling a company takes time and if you wait until the hockey stick growth levels off, it could be too late or you won’t get the same valuation that you would in growth mode.
Common mistakes by companies seeking to sell are waiting too long (market changes, growth stagnates, owners become tired) or even to the point of distress. At that point, the options for exit are severely limited.
If you have good outside advisors, such as a board of directors, legal counsel, executive coaches and accounting/financial advisors, they should be helping you see your blind spots. Certainly, all CEOs and founders in growth mode should stay the course. But, most companies don’t experience hockey stick growth forever. It is many times hard to see the future coming when you are singularly focused in the growth mindset. A founder should always be looking at the following to determine if entering a competitive M&A process is the right time:
- Industry growth: Is your industry continuing to grow at a strong rate? What are third-party analysts predicting about your industry? Or, has there been a significant decrease or increase in their coverage of your industry?
- Competitors: Are you seeing more or less competitors to your company? If you start to see significant price reduction pressure, tons of new competitors or no new competitors, those are all signs of a market change that can have an effect on your valuation.
- Hotness quotient: Are you getting lots of calls from M&A advisors, PE firms, and/or investment banks? These are signs that your company and/or industry is hot. It never hurts to take the call, if nothing else to learn what opportunities are available.
- Cooling: In the event that you foresee a cooling for your industry, consider taking immediate action to sell your company at a higher valuation.
- Readiness: Many times, it takes 3-12 months for a company to be ready to enter a competitive M&A process. You may need to add team members, clients, clean up financials, etc. These can all take time, so understanding your readiness is important for timing. Consider an exit readiness program to help you be prepared.
- Founder energy: Founders get tired! Starting and running a company is exhausting and sometimes, it is time for the founder to do something else. It’s best to sell before you get to the breaking point because the acquirer will likely want you to stay on for 1-2 years to transition and earn out, so recognize the signs of burnout before they are too late.
- Comparable deals: Always be aware of comparable M&A deals taking place in your industry. This is a sign to you if multiples on EBITDA or revenue start to shrink. Conversely, if it appears that multiples are at the top, consider selling at that time to receive the maximum value for your business.
- Strategic Partnerships: It can take 12-24 months for a strategic partnership to develop to the tipping point of acquisition. It’s a good idea to start early, identify partners and develop the relationship for mutual success.
- Market position and brand recognition: What is your position within your industry and how is your brand recognized by customers? Customer validation and loyalty is extremely important in the valuation of your business. If you need to work on this, it can take time so it’s vital that you know and can make improvements, if necessary, in this area.
- Financials: Do your financials show 2-3 years of growth in revenue and profitability? Acquirers want to buy strong businesses with good cash flow. If your financials are starting to level off or decline, you may have missed the best time to sell your business for the highest value.
- Staff turnover: If you see your staff (especially young people) leaving for one or two of the same competitors, they may be seeing a better opportunity in the market. It’s wise to pay attention to why your staff turns over and where they are going.
A good M&A advisor will give you honest feedback about whether you are selling at the best time for the highest valuation by conducting several exploratory sessions with you. It’s most important to recognize the best time for your business when you are in growth mode. If you wait, you just might lose that opportunity. That is not to say that you won’t sell your business, but you probably won’t sell for the highest valuation.
I provide complimentary consultations with potential new clients to explore the right timing for you. I also provide an exit readiness program to help you be thoroughly prepared for a competitive M&A process. Call me today to learn more about how I can help you navigate the timing of selling your business.