When to Sell a Business and Why
Deciding when the time is right to sell a business is one of those questions that many private owners as well as public companies struggle with. In some cases, unforeseen events like the pandemic create uncertainty about whether full value can be realized in a down market when revenues and profits may be depressed as compared with prior periods. On the other hand, as we seen in the past year, extraordinary events might have a favorable financial impact on some businesses. As such, an owner might wonder whether the current environment could be an opportunity to sell a business at a premium. For public companies, extraordinary business conditions might even create a window of opportunity to unload non-core businesses that are suddenly making record profits from a spike in demand due the pandemic.
But as we return to more normal business conditions this year, the question remains: when is the right time to sell? In some cases, a unique opportunity may arise to force an answer. For example, an unsolicited offer comes across the transom that is simply too good to pass up. In fact, strategic and financial investors have a lot of “dry powder” to work with and there is plenty of liquidity in the market. Aggressive buyers are looking for new platforms as well as add-on acquisitions to existing platforms. Moreover, in highly fragmented markets, there are many consolidation opportunities by means of serial acquisitions. So, if you are an owner, and a qualified buyer knocks on your door, what do you say? How do you know whether now is the right time to sell your business?
Answers to this question depend on weighing many factors. Of course, these factors differ in many respects between private and public companies. For middle-market companies managed by founders, such factors include competitive, economic, family, emotional, and a wide range of other considerations. But even for public companies, a business carve-out may hinge on not just the offer but also on the terms and financing of the offer, possible financial communications challenges, and earnings or balance sheet risks.
So, when is the right time to sell a business? Is this one of those metaphysical questions for which there is no clear answer? Perhaps. On the other hand, there are a few things we can say about timing a sale of a business.
To realize a premium for a business, there is a strong argument to sell when the future looks very bright. Buyers pay premiums for future growth and profitability. This manifests in a higher pricing multiple than a seller can realize in mature or declining businesses. We can also say confidently that it is possible to sell too soon; that is, before a company’s growth potential has materialized. That is one of the reasons why it is very hard to sell an early-stage company without demonstrable revenue growth or profitability. When such a company has proven its business model, established its competitive advantages, proven that it can make a profit on a continuing basis, and can point to exciting and reliable growth prospects, then the owners should ask: is now the right time to sell? Entrepreneurs who have built multiple businesses and successfully exited understand this economic calculus for selling a business based on a proven record of profitability and compelling future growth prospects.
For public companies with a portfolio of businesses at different places on their respective industry lifecycle curves, answering the question about when the right time is to sell a business can be just as straightforward. From a strategic perspective, when someone else thinks a business you own is worth more than you think it is worth, that is the right time to sell! The capital recaptured through the sale can be redeployed, possibly in acquiring another business which better fits the long-term aspirations of the seller.
In addition to timing a sale, owners need a rationale to engage in a good faith sale process with an interested buyer. There are today frequent and growing inquiries from financial sponsors as well as strategic buyers. A business owner may be wondering if there is a case to be made why to sell now in light of this strong interest from potential buyers.
Here again, there can be many reasons, and usually a combination of reasons, why an owner of a company that is not for sale may decide to consider the possibility of an exit. Especially in the wake of the pandemic, some owners may be feeling burned out with the challenges of trying to keep their businesses going in a very demanding environment. For owners who are not determined to remain private whatever the costs, they may see the opportunity for creating liquidity to capture the unrealized value built up in the business over decades and for funding an estate plan benefitting heirs and the institutions they care about. This can become an imminent priority for owners of advancing age or declining health. Even if age or health are not driving forces for an owner, there could be a host of other reasons for selling such as the owner’s outside interests, tax considerations, diversifying wealth, etc. Besides personal factors, answering the question of why sell now may also revolve on business issues. For example, selling an equity interest in or an entire business may provide working capital, plant and equipment, or other assets to capture the growth potential of the business.
While the specific rationale for selling will vary from one owner to the next, periodically thinking through the questions of why and when to sell a business is the best way for an owner to exit successfully. That way, an owner will be able to act confidently when the right opportunity comes along. Or, as the saying goes, in selling a business successfully (as with other things in life), opportunity always favors the prepared mind!
CEO, CDI Global