When is the Right Time to Sell your Business?

Right Time to Sell a Business. Person holding pencil near laptop Photo by Helloquence on Unsplash.

One question that comes up in many of our conversations with business owners is “when is the right time to sell?” The correct response to this question, and the honest answer, is “when everything is going well.” This answer is often a surprise to the owner, but is really true. 

Timing is Key When Selling a Business

Timing plays a significant role in determining the value you receive when you sell a business. In some cases, bad timing may even make your business unsellable. M&A activity correlates closely to economic trends. When the economy is in an uptrend, businesses are buying other companies to gain market share, increase profits, and grow revenue. A lot of deals get done at attractive valuations. Once a recession starts, however, acquirers pull back, acquisition volume goes down, and valuations typically contract. 

The Right Time to Sell - Case Study of a Successful Business Sale

Company #1 was in the high-end pleasure boat business, and had been in operation for over 40 years. Over these 40 years, the owners of the company had grown the business from one small location to three locations in two cities. They were selling the leading ski/wakeboard brand, as well as the top brands of fishing and offshore boats. Customer service was excellent, the owners were extremely hard working, and the business was well-organized. They had consistently been ranked in the top ten boat dealers in the country, and just recently named the top boat dealer in the US for the second time by the leading trade association. Over the past 40 years, the business had experienced real challenges during downturns however, as the purchase of a high-end pleasure boat, costing  over $100,000, was definitely a discretionary purchase for the consumer.

In 2017, they were approached by a strategic buyer to explore the sale of the dealership. The owners decided they needed representation on their side of the table, and our firm was engaged. Our advice was to execute a two-fold strategy. First – we asked the buyer for 45 days to allow our team to put a Confidential Business Memorandum (CBM) together on the business, and organize our client’s information into a data room. The existence of the CBM was twofold:  First to have our information prepared and allow us to have meaningful discussions with other possible buyers, while ongoing discussions were proceeding with the one active buyer. Second - the existence of the CBM would let the existing buyer know that their might be other suitors in the mix, and let them know they may be in a competitive situation. If a buyer perceives that they are the only buyer in the game, they know they have the leverage to control both timing and price negotiations. 

We researched other possible strategic and financial buyers while preparing the CBM. The first buyer began reviewing the information and brought the management team in for a site visit and discussions. They then returned home, sent follow-up questions, and began putting an offer together. 

Our firm then contacted four other possible buyers, and had preliminary discussions with each. Two of these buyers were interested, and one brought the management team into town for a site visit. For this buyer, the purchase would be a vertical integration, as they were a manufacturer of several brands. After evaluating the transaction, and digging into the strategic ramifications of the purchase, they decided not to submit an offer. The second buyer was a private equity group, that was doing a roll-up of existing dealerships. Their indication of the valuation range, was just below the valuation that the first buyer had indicated in the LOI. 

At this point in the process, many business owners will try to continue to negotiate, and delay the transaction, as business is great, why sell now? As the economy had been in a growth mode for over 9 years, our client was keenly aware that this was the right time to sell, even though year over year revenue and profits were growing. They understood the reality that if the economy went into a recession, their industry would be dramatically affected, and it would be 4 -5 years before the business value and opportunity to sell in a favorable position might occur again. Almost all transactions require debt of some form as part of the buyer’s capital structure, and lenders require at least three years of profitable, growing financials to finance an acquisition. Business risk also comes into play in all industries. New technology can change an industry, brands change, consumer buying habits and interest rates can change, which can all have a dramatic effect on the business value. Top managers leaving suddenly and other unexpected events out of the owner’s control can impact value.

Was it the Right Time to Sell?

In this case, it was the right time to sell the business. The price and terms were negotiated, due diligence completed, and the transaction closed. Selling a business is often the largest financial transaction in a business owner’s life, and timing can be a critical factor in receiving the best value in the transaction.

Selling a business. Person sitting on chair holding tablet. Photo by Adeolu Eletu on Unsplash.

Our next report will outline a transaction that was not successful due to timing.