We talk to a lot of founder-owned business and entrepreneurs in our line of work, and a common topic of discussion that comes up is “When is the right time to sell my business?” A lot of successful entrepreneurs tend to like being in control and are optimistic by nature, and therefore, feel they will be able to perfectly time their exit from their business. Sometimes it is possible, but many times, there are several other factors at play that are truly out of one’s control. In order to sell your business once you reach a certain revenue or EBITDA number, or at a specific point in time in the future, there are often going to be numerous things that will all have to go your way until then, and others that will have to come together at the same time to achieve the desired result.
So, when is the best time to sell your business? Well, that depends on several factors, including what I feel are three very important questions a business owner needs to consider.
Is the business ready to sell?
In order to efficiently get through a transaction process, whether you’re selling outright, recapitalizing or raising growth capital, your business will need to be ready both operationally and administratively. Most owners are very good at getting the business operationally to a stage where it is ready to enter its next phase of growth, but many are surprised by what it takes on the financial reporting and administrative side to get through a transaction.
You will need to be able to assemble a large amount of information in an orderly manner. Whether these are financial metrics such as being able to track gross margins by customer, product, or what percentage of your sales go in to specific end markets, or making sure your insurance, legal and human resources documents are organized, there is a large amount of data and reporting that will be required. Are your current systems capable of tracking and reporting on these types of things? Most businesses in the lower middle-market are going to require some level of “clean up” in preparation to go to market.
Is it a good time in my industry?
If there are things in your industry coming that cause you concern, or even may be the reasons that you are wanting to sell, there’s a really good chance the potential buyers will know it too. At certain times, certain industries fall out of flavor with private equity groups. The oil field services industry is a great example of this. As oil rises and falls, so does the market’s appetite for companies operating within that sector. It’s probably not the time to sell your business when there are things happening in your industry that will negatively affect your business or make the environment difficult for your customers. If your industry is in transition and margins are being squeezed, it will be a tough time to get a good value for your business. Uncertainty of new regulations, commodity risk and tariffs are just a few examples that can affect some industries and not others. Remember, a private-equity buyer will need to be comfortable that they have ample runway in front of them after they buy your business for them to grow it and eventually exit the business. When you sell your business, you need to consider that the buyer may already be thinking about how and when they will exit the business.
Is it a seller’s market?
Another thing to keep in mind is the overall economic outlook and the current M&A environment. Are all the economic indicators positive and the economy is churning along, or are there signs of a slowdown coming to the overall economy? Are there a lot of M&A deals getting done? Have there been a lot of private equity fund raises lately resulting in a significant amount of “dry powder” sitting around that needs to be invested? How have transaction multiples been trending? Most of these factors contribute to both the probability of a successful exit and the valuation achieved, but they are all definitely beyond the seller’s control. It has unquestionably been a seller’s market for the last several years, but that does not last forever. The tide will turn eventually, and usually by the time you know it’s turning, it’s too late to benefit from the advantages enjoyed during a seller’s market.
There are many factors that play into the decision of when is the right time to sell your business. Since most owners will want to exit their business at some time, it’s never a bad idea to assemble your trusted advisors – your lawyer, investment banker, financial planner and tax advisors – to discuss the potential of selling your business and what the timing and markets may look like for your business and industry specifically. Ultimately, the best time to sell your business may not be the exact time you had planned, but when the greatest number of variables are tipped in your favor.
Romanchuk & Co. is a boutique investment banking firm providing mergers and acquisitions (M&A) advisory and financial consulting services to lower middle-market leaders within the energy and industrials sectors. Recently named Boutique Investment Banking Firm of the Year by The M&A Advisor, we advise owners and investors of privately-held businesses on the preparation and sale of their company, assist them in identifying strategic opportunities, and help them execute upon those strategies. We specialize in providing sell-side M&A advisory services to lower middle-market companies with revenues or enterprise values ranging from $15 million to $250 million. For more information, please visit www.romanchukco.com.
Mr. Romanchuk is a Registered Representative of, and Securities Products offered through BA Securities, LLC, Member FINRA (www.finra.org) and SIPC (www.sipc.org). Romanchuk & Company, PLLC and BA Securities, LLC are separate and independent entities. Any testimonial or endorsement may not be representative of the experience of other customers and is no guarantee of future performance or success.