Preparing a Business for Sale – Timing Your Exit
By Peter Watson, Prism Corporate Broking
One of the most common questions that we are asked is “is it the right time to sell?” There are a number of underlying concerns – Am I going to maximise value? How will the business perform in the future? Are valuations at their peak? Do I really want to get out?
We see 3 principal elements which should govern the decision to sell:
• Personal objectives
• Business performance
• Market for business sales (in a particular sector)
Typically a combination of all three come to play, however in the case of the former, it can be a sole driver at times (eg divorce, ill health etc). There is a reason for the order – for owner managers starting with the personal objectives is important – get these wrong and it is likely that a future sale will be scuppered in any event – often after a great deal of expense and aggravation.
Leaving it too late is a common problem. Either the owner manager has lost his/her impetuous and desire, and business performance starts to suffer, or they still have the desire but their own performance has declined and with it, the business. To exert negotiating pressure you need to be happy to continue working on.
What about business performance? The business needs to be prepared for exit – this should be assessed before a decision is made. The ideal scenario is for the business to have addressed the key readiness issues identified, have evidence of consistent profitability coupled with a strong performance during the sale process. The sale period often extends to at least 12m, so in any decision to put a business onto the market , the performance over the next 12m is at least as important as the preceding period. Poor performance during due diligence can be disastrous and present your broker a twig with which to beat the opposition, instead of a large stick!
Owner managers often fool themselves into believing that the future performance will be much better than historical performance would suggest ( perhaps it is this optimism that characterises many owner-managers), however in the desire to avoid underselling the business, many end up in just that situation. Selling whilst you are still confident about the future is key as this will inevitably be communicated to potential buyers.
Finally what about the market for Mergers and Acquisitions? How important is this as a consideration for owner-managed businesses.
The answer is less so than many perceive. Valuations for smaller businesses vary within a much tighter range than their larger brethren –being discounted substantially compared due to perceived higher risk.
Competition is important in driving up value, hence a period where a sector is “HOT” is clearly beneficial. This tends to be industry specific rather than due to general market sentiment. Despite the recession there has been very little let up in activity in the digital domain for instance. Strategic decisions simply cannot be delayed when a market is developing rapidly.
So is this the right time to sell? The answer is that it depends on the factors outlined above, and is always a balancing act. But remember that embarking on a sale process does not commit you to sell – and many more people fail to achieve their expectations due to delay that going to the market too early.