Sellers often ask us if it is a good time to sell their business. My response is usually, “yes, but it depends”. The optimum time to sell a particular business depends on many factors, and this article discusses some of them.
First of all, timing depends on the company:
- How are its business fundamentals?
- Is it growing? Flat? Shrinking?
- Is it profitable? How is the quality of earnings?
- What is the outlook for the business for the next 5 years?
- Does the company have a good management team in place if the owner leaves?
- Does the company have intellectual property? Is it robust? Is it protected?
- Does the company have concentration risk? Customer, supplier, etc.?
- How many family members does the company employ?
- How many personal expenses does the owner run through the business?
- Is working capital being optimized?
The state of the industry is important too:
- How are industry fundamentals?
- Is the industry growing? Flat? Shrinking?
- Are there industry buyers?
- Is the industry consolidating?
- Are there any trends or changes on the horizon that could have an impact (good or bad) on your company?
The economy also matters, and market conditions factor in. When the world, U.S., state or local economy stalls, it can be difficult to sell businesses, at any price. Economic factors include:
- Is the economy growing? Flat? Shrinking?
- Is the economy stable? Any risks looming?
- What is going on with interest rates?
- What is the status of the Mergers and Acquisitions (M&A) market? Are strategic buyers and Private Equity Groups (PEGs) active or sitting on their wallets?
- Are lenders lending?
- At the low end of the market, are individual buyers buying? This may be contra-cyclical. In good times, individuals may not want to leave lucrative jobs. On the flip side, when people lose their jobs, some decide to buy a small business.
Last, but not least, your situation as the owner has a major influence on sale timing:
- Why sell? Retirement? Illness? Death? Divorce? Burnout? Generally its best to have a good reason.
- What are you planning to do post-sale?
- If the business sells at its probable selling price, will you have the funds to support those plans, after taxes? Will you need all cash, or can your provide some seller financing?
- Are you interested in retaining a stake in the company for investment?
- Do you have family or management that want or expect to take over the business? Are you willing to leave some money on the table (vs. a strategic sale)?
- How do you want to be involved with the company after the sale? Is there a time by which you have to be completely out?
- How important to you are the ongoing success of the company, continued employment of staff, customer or supplier continuity, etc., versus maximizing proceeds?
There are more questions, but this is a good start. The point is, deciding when to sell a business is complex and deserves thoughtful analysis. Some of the answers will be easy, others require more analysis and assistance.
So, is 2017 a good year to sell?
For the first time in a long time, most small-to-medium-sized businesses can look back and see five solid years of financial performance. And, importantly, owners and investors can look forward with an expectation of good years to come. It has taken almost a decade, but most companies have completely shaken off the effects of the Great Recession. Furthermore, in most industries, strategic acquirers, private equity groups and lenders are writing checks and valuations are strong.
So, fundamentally, YES, 2017 is a very good year to sell, in the U.S., in California and in the Bay Area, and in nearly all industries. Of course, the full answer depends upon your specific company and personal circumstances.
Contact Roy Martinez with an immediate need or for further information on exit strategies and the market for your business.