Timing is Everything – Determining the Best Time to Exit Your Business

Successfully selling your business is a combination of science and art. As with all things, failure to prepare is preparing to fail.

Emotionally Ready

The first question I always ask of clients contemplating selling their business is, “Are you emotionally ready?” It is not always easy to walk away when you’ve invested so much blood, tears, toil and sweat into your business. 

Selling a business is an arduous undertaking and timing is a critical element to a successful sale. Ideally, you will have made your decision to sell two-to-five years in advance, so in addition to emotional readiness, you will need to factor in several practical considerations, and as the saying goes, “timing is everything.”

The Earlier you Plan, the Better

In most cases, the further out you plan for your sale the better. This will give you time to achieve a record of consistent growth and earnings, for instance, that will be far more attractive to buyers than a series of peaks and troughs. 

A deep analysis of your business–what we call a ‘360-Degree Assessment’–can help to identify gaps and set in place corrective measures and achievable strategic plans for growth. This process takes time, and so does growth.

A common mistake I see often is CEOs who, upon deciding to sell their business, start reducing headcount by firing people or not filling staffing gaps, or cutting their marketing or R&D budgets, for the appearance of increased profitability. These things are obvious red flags for buyers and may have the unintended outcome of slowing growth. They’re like hanging new drapes in a house to help sell it while hoping nobody notices the hole in the roof. 

It’s practical to reduce costs, but I recommend looking at low-hanging fruit first, like shopping all your contracts to get the best services for the lowest prices. One of the first things I perform is an assessment of cost takeouts and rationalization. I look at areas to cut or lower costs, increase profitability, and ways to better position the company for a sale. A working capital adjustment can also potentially save you money and prevent layoffs. A potential buyer would consider all these smart business decisions. 

Economic Cycles

Obviously, your hope is to sell your business at a high point in the economic cycle. During points of low economic growth or recession, companies tend to sit on their cash. But when they are feeling confident about the future, they are more likely to look for investment opportunities and will want to put their cash reserves and capital to work. 

If your company has a particularly unique capability, however, then you may be more immune to the fluctuations of the economy since your business may augment or fill a capability gap for a competitor.

Business and Industry Cycles

Determining the best time to put your business on the market may depend on other cycles as well.  If you’re in the government contracting industry, for instance, you may want to wait until the annual budget cycle ends to add as many last-minute contracts as possible to your company’s backlog.  

If you’re a potential target for a merger or acquisition, there may be cycles of consolidation in your industry that you’ll need to decide whether to ride or sit out. 

Looking at your business specifically, you’ll want to determine the point at which your past financials will look most consistent, your backlog and pipeline will look most promising, your management team will look the strongest, and your strategic plans and financial models will look the most optimistic. Clearly, these take a couple of years of planning and optimal performance levels to predict accurately!

Another area to look at is your investment cycle. For example, say your company made $25m in revenue one year with a $5m profit. That’s a 20% margin, which is pretty attractive to an investor. But what if the next year you make $35 million in revenue, but you still only make a profit of $5m. That doesn’t look so good, right? Well, that depends. If the profit is lower because you invested $2m in new equipment, then that’s planning for future growth. This can be justified to a potential buyer. However, if the profit was $5m because you and your directors took a $2m distribution, this is a lot harder to defend.  

This is where “assumption-based modeling” can help sellers better understand decisions and their consequences. By running through a variety of scenarios (some of which may have already played out either successfully or unsuccessfully), you’ll have a better idea of the decisions and outcomes that are defensible or not. The key to avoiding buyer discounting is being able to defend those decisions in the face of a buyer’s audit and due diligence process.   

The Tax Year and Tax Changes

One final consideration to keep in the back of your mind is to seek advice on tax changes. Tax code changes can affect both your take-out from a sale and the implications for your family’s tax liabilities if selling is a prelude to the dispersal of funds to children. There will also be tax implications for potential buyers that may affect their risk/reward ratio. It’s extremely important to get a tax professional involved early in the sales process.

Conclusion

Most attempted business sales fail (or see significant buyer discounting), but that does not mean successful sales are rare. As many of my blog posts are designed to show, success requires careful planning, a strong understanding of the buyers’ perspective on your business’s strengths and weaknesses — now and in the future — and experience identifying and capitalizing on their motivations.

About The Author

Tom Springer has over 20 years of experience providing strategic planning, business development, interim management and technical advisory services for private equity firms, portfolio companies and public and private enterprises. Tom is skilled at growing enterprise value by creating highly productive sales and service teams, developing new lines of business and fostering client relationships. He is known for solving complex business problems by aligning technology with business and operations.

You can contact Tom at [email protected].

About Schneider Downs M&A and Transaction Advisory Services

The Schneider Downs Transaction Advisory Services and Corporate Finance Teams provide the strategy, guidance and services organizations need to create value through all stages of a transaction, including due diligence and quality of earnings, mergers and acquisitions, exit and succession planning, capital raising and corporate finance.

Visit our dedicated M&A and Transaction Advisory Services page or contact the team directly at [email protected]. 

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