When Should You Sell Your Business?

We speak with investment bankers and other business advisors constantly as part of our job. In speaking with them, one of the issues that comes up the most is the trepidation business owners feel moving forward with the sale of their business in the current economic climate. After years of painstakingly building their company, many business owners have seen their numbers take a startling dip in 2009, and are not pleased with what this could mean for the ultimate transaction value of their business, should they choose to sell. This problem is especially acute for individuals who have most of their family’s net worth tied up in the business — for these business owners, their future plans are dependent on monetizing the value that they’ve created.

This makes a hard decision harder. In some cases, outside factors make selling a must: age, health, or the pressing opportunity cost of other business ventures. But for many business owners, a dream has simply been delayed. Entrepreneurs who had 2009 penciled in as the beginning of their golden years (or of their next big challenge) are suddenly finding themselves compelled to wait, and often their advisors are encouraging them to do so. As one advisor put it, “You can sell any company for $1. The hard part is getting the right price.”

Putting the brakes on the sale process may naturally seem to be the prudent decision, but it is not without risk itself. After all, the decision to wait is predicated on the belief that the economy will recover in the near-term. This is certainly the hope, but business owners should also prepare themselves — mentally and financially — for the possibility of an off year in 2010 and beyond, and for what this would mean for the market value of their company as strong performances in 2006 and 2007 recede further into the past.

Worst case, this could result in the business owner working a number of years longer than they intended to, in a difficult business environment, without achieving the sale price that they have been dreaming about for so long. Ideally, on the other hand, sales will improve over the next 9-12 months and entrepreneurs will quickly regain lost ground. It will be interesting to see how the M&A market responds over the next few quarters as business owners who have been impacted by the recession collectively weigh their options.