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Three Key Questions Owners Have When Beginning to Think About Selling Their Business

When is the best time to sell a business?

The best time to sell is when the business has a strong historical track record coupled with solid future growth prospects. Notice this definition does not stipulate that earnings have to have peaked. Contrary to popular belief, buyers don't buy historical earnings, they buy future earnings. If the earnings have topped out, they usually have nowhere to go but down. A business at its peak with declining future earnings, might have high earnings but for purposes of computing its value, it may trade at a lower multiple or may not trade at all. If you wait until the business reaches its peak, you may get lucky and find a buyer that fails to recognize that earnings are unsustainable, then again, you may miss your window of opportunity altogether. Don't wait too long to sell - a window of opportunity is better than no window at all.

In practice, the best time to sell a business is after it has at least 2-4 years of historical growth with a clear and reasonable forecast of at least 1-3 years of projected growth. This scenario affords a high level of current and future earnings, a high multiple and strong likelihood of success.

On a more personal level, the best time to sell is:

  1. while you still have your good health, as your continued involvement post-sale may be an important part of the buyers perceived value of the business;
  2. before your demise so that your spouse is not forced to take on this undertaking in your absence; and
  3. before you get "burned out" recognizing that selling the business will take a relatively long and concerted effort.

What is the Value of my Business?

Valuing a business is both an art and a science. Numerous variables go into the valuation mix. These are divided into three main categories: company factors, financing factors and transaction or sale related factors. The principal company factors are as follows: growth rate, size, assets employed, profitability, quality of the management team, degree of intellectual property, distribution channels, level of competition, synergies, etc. Financing factors relate to the ability to finance a transaction-without which there is no transaction. Financing factors include: prevailing debt multiples, lender advance rates, interest rates, stability of cash flows, industry perceptions, etc. The final factor driving valuation is the method of sale. A private sale (seller deals with one buyer usually without engaging the services of an investment banker) tends to yield a lower valuation than a public sale (seller insists on dealing with multiple prospective buyers with the assistance of an investment banker who conducts a comprehensive and broad based auction).

Generally speaking, middle market companies tend to be valued at a multiple of Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA"). In the final analysis however, value is in the eye of the beholder. An investment banker specializes in creating and harnessing the power of a market (creating a supply-demand imbalance which increases the valuation of a business and tilts the balance of power in the seller's favor). Simple economics states that price is a function of supply and demand. By increasing the demand for a business, investment bankers play an important role in maximizing the price ultimately paid.

Other than "price", is there anything else I should be concerned about?Absolutely. Price is just one of a number of variables. Factors such as timing and form of payment, deal structure, pre-closing conditions, holdbacks and post closing adjustments, representations and warranties, and indemnifications provisions have a significant impact on any given outcome. Failure to recognize and fully consider all elements of a transaction, will likely lead to disappointment and regret later on.

For example, a seller may receive two or more seemingly identical offers (i.e. the offer amounts are the same). Depending upon the deal structure, the after-tax proceeds of each alternative could vary significantly. Even though both parties are offering the same price for the business, the seller receives substantially more or less on an after-tax basis depending upon which alternative is chosen.

Payment terms may also impact the economics of one proposal versus another. Cash is preferable to other forms of consideration such as stock, note or earnout. One offer may on the surface be higher than another but actually be less attractive if it incorporates significant amounts of deferred or contingent consideration. The trouble with deferred or contingent consideration is that the seller may never actually receive it.

What Steps ShoulD I take to Prepare my Business for Sale?

This may sound self serving, but perhaps the best thing you can do is to find a good investment banker. The case for employing an investment banker (irrespective of whether or not you select our firm) cannot be emphasized enough. Investment bankers will help you with all aspects of preparation and implementation. Every business has certain skeletons in the closet, yours may also. An investment banker will help you deal with these issues ahead of time. Even the most seemingly serious problems can usually be dealt with, if discussed upfront. If they become last minute surprises, best case, they erode the buyers trust and belief in the seller, worst case, they can undermine the deal entirely.

Other suggestions include: (i) develop a strong management team and succession plan; (ii) be in a position to provide at least two (2) or years of reliable financial statements prepared by a reputable certified public accounting firm; (iii) develop a sound, reliable and timely internal reporting and information management system. During due diligence, the process will benefit tremendously by your ability to respond to detailed questions in a timely, accurate and comprehensive manner.