Four Considerations for Timing the Sale of Your Business

For most business owners, selling your company will be a defining moment in your life. Whether it’s a family-owned business that has been passed down from generation to generation, or a company that you’ve taken from inception to execution, the process of selling your company can be an emotional rollercoaster riddled with unforeseen pitfalls — after all, the last thing you want to see happen is see your company in the hands of the wrong buyer, or sell the company for much less than what it’s worth.

Of all the things that can derail the successful sale of your business, timing the sale can have a huge impact on your company’s ultimate valuation and salability. Most business owners we talk to have an exit horizon determined by when they plan to retire or leave the business – but to their peril, they often ignore a number of both internal and extraneous factors that can affect their company’s valuation and even the viability of a successful transaction taking place.

As you ponder whether you should start preparing to sell your company now, in three years, or ten years from now, be sure to include the following key considerations in timing the sale of your business:

Core financial performance

A common methodology used by buyers to value your business is a discounted cash flow (DCF) analysis. This method takes the sum of the discounted future cash flows of your business to get an approximate present-day value of your company. The outcome of a DCF valuation is subject to a lot of assumptions about the growth trajectory of the company, but a generally accepted baseline is to look at a company’s historical financial performance – typically the most recent three years – in order to project growth in future cash flows. Accordingly, businesses showing strong, predictable growth over two to three years before a sale will be worth more than those with erratic or little growth, all else equal. This is why you’ll typically hear experts recommend that you sell your company at the height of its financial performance, and despite the temptation to hold onto your business in order to reap the benefits of such growth, peak performance is the perfect time to sell – and if you can find the right advisor to assist you, you’ll more than make up for “lost” cash flows with a hefty price tag for your business.

Broader industry and economic trends

Numerous factors external to your company’s core financial performance will impact valuation and your timing of a sale. Industries undergoing rapid changes – due to new technologies, for example, or regulatory changes – will see the average industry multiples change accordingly. Government fiscal and monetary policies, too, can affect timing. For example, many sellers who had been contemplating a sale in 2012 were motivated to accelerate the process due to the expected hike in capital gains taxes in 2013. Similarly, rising interest rates makes it more costly for companies to finance their transactions with debt, and M&A activity may slow down as a result. Perhaps the most glaring example of how the health of the broader economy affects the sellability of your company is the global financial collapse of 2007/2008. Amidst widespread uncertainty and volatility, companies held on more tightly to their cash reserves and M&A activity dipped to a multi-year low in 2008. Though you may feel that most of your company’s value is tied to the strength of its financial performance, be sure to take into account how some of these other factors will impact the success of a transaction.

Your personal post-transaction goals

You may not know what you want to do after you sell your business, but you may be very certain that you want to exit it entirely and move onto the next stage of your career (or life). If you’re heavily involved in the day to day running of your business, however, what you may not realize is that many buyers will want to see a management team in place that can help run the company after the sale. Without an experienced and trusted team at the helm, buyers will either be spooked from the process and walk away, or require that you stay on post-sale to help with the transition. The best way to ensure you make a clean exit is to start building and developing a bench of management talent that can help a new owner, but this will take years – not months – to do.

Building the right relationships

For many CEOs and business owners, the price of their business isn’t the only – or most – important consideration in pursuing a successful transaction. In fact, many private company entrepreneurs care as much about the legacy and continued success of their company as they do about the size of a check. The only way to be sure you’re selling your company to the right buyer – and that you’re being advised by an investment banker or M&A advisor who understands your non-transactional goals – is to take some time to build relationships with folks you’d like to get to know before working with them. Most CEOs we talk to are typically doing this at least two to three years in advance of an sale.

You don’t decide to sell your company today and have it sold tomorrow. Deals take time and the timing is affected by your personal motivations and goals, core business performance, and the broader economic climate. You never know when you might be approached with the perfect unsolicited offer for your business, nor can you be truly prepared for unexpected personal circumstances that might accelerate your decision to exit. The only way to ensure the most successful outcome for you and your company is to be thinking constantly about the relationships you need and preparations you should be making.