Successfully selling your business is a combination of science and art. As with all things, failure to prepare is preparing to fail.
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 a number of 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, 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 cut their marketing or R&D budgets, in order to appear to have increased their profitability. These things are obvious red herrings 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 good to reduce costs but I recommend looking at low hanging fruit first, like shopping all of your contracts to get the best service for the lowest price. One of the first things I perform is an assessment of cost takeouts and rationalization. I look at areas to cut or lower costs, to increase profitability, and to better position the company for a sale. A working capital adjustment can also potentially save you money and actually prevent having to make layoffs. A potential buyer would consider these all smart business decisions.
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 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 strongest, and your strategic plans and financial models will look most optimistic. Clearly, these take a couple of years to planning and performing to predict accurately!
Another area to look at is your investment cycle. For example, say your company made $25m in revenue one year with $5m in profit. That’s a 20% margin which is pretty attractive to an investor. But what if the next year you make $35million 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 been 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 and to seek advice on are 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.
The majority of attempted business sales fail (or see significant buyer discounting), but that does not mean successful sales are rare. As many of these blog posts are designed to show, success requires careful planning, a buyers’ perspective on your business’s strengths and weaknesses — now and in the future — and experience identifying and capitalizing on their motivations.
Tom Springer is a founding partner in Springer Lawson & Associates, a consultancy of former C-level executives who help mid-market companies maximize enterprise value in advance of, during, and following major business transactions or disruptions.