Sometimes, An Owner Just Knows
There are times when putting a business up for sale is the best — or only — next step. All owners need to recognize the signs that they’ve reached this expiration date so they can properly prepare for a sale and start building the case for a reasonable sale price.
Your company doesn’t necessarily need to be in financial straits or experiencing market pressures for you to know it’s time to sell. In fact, it’s a good idea to prepare your business for sale before declining or distressed circumstances occur. Founding owners aren’t always the best people to run a company over the long term. Often, smaller businesses need the money, resources and talent of a larger company to get over a growth hump.
Calling it a Day
There are plenty of good reasons — both personal and strategic — for owners to decide that a stage of their business has come to an end. Consider, for example, owner burnout. Founding owners, particularly those of an entrepreneurial bent, frequently get bored after a decade or so running the same business. If you’re an owner who dreams about the next start-up, seriously consider selling your current concern so you can finance that dream.
Maybe you’re nearing retirement age and want to relinquish your stressful role for travel and time with family and friends. If yours is a family-owned business, the younger generation might be interested in inheriting it. But don’t be surprised if your children have other plans and you need to sell to an outsider.
What if you’re still strongly engaged, but your business is struggling to grow? Often, this is a sign that you need to join forces with a competitor or a larger corporation with greater resources. Similarly, you may find it hard to recruit skilled executives and other talent on your business’s tight budget or purchase equipment that would enable you to expand your product offerings. Such factors should at least make you consider selling.
Finally, sell when your business is peaking. If you wait until conditions decline, buyers will hold all of the cards in deal negotiations.
Bow Out On Top
A company with solid earnings, low debt and a corner on its market will have no shortage of prospective buyers. But do these ideal conditions really suggest it’s time to sell? If your business is thriving, think about where it’s likely to go from here. Two questions can help you decide:
1. Has the company reached its peak? Essentially, can your business sustain current sales and market share, or is it all downhill from here? Perhaps something that gives you a competitive advantage now — for example, your current executive “dream team” — won’t exist forever.
2. Is the sector tapped out? Look at the growth rates and valuations of your competitors. If everyone’s doing well, your sector may be overheating. Consider too whether new regulations, higher raw materials costs or other outside influences might hobble the industry. Increasingly, technological advances are making certain products and services obsolete — just ask paper mapmakers and film developers.
If your industry’s growth rate seems unsustainable or research has convinced you that your sector is headed for a crash or permanent slowdown, it may be time to sell.
Get the Timing Right
It’s important to remember that, even if you have good justification for selling, timing is critical. For example, a broad economic (not sector-specific) downturn or lending freeze may make it necessary to put your plans on hold. Be prepared, so you’re ready to strike when the iron’s hot.
Sidebar: Surveying the Buyer Landscape
Putting your business up for sale may be one of the hardest decisions you ever make. And once you’ve pulled the trigger, it’s natural to worry that the right buyer offering the right price won’t be out there.
Ease your anxiety by working with your M&A advisor to survey the landscape and identify likely buyers. For example, do any of your competitors seem to be amassing cash? Over the past five or six years, many companies have squirreled away cash for an unsure economic future and a more promising M&A market. They may now be ready to spend it on an acquisition.
Are any of your competitors stalled out or losing market share and possibly in need of a new business partner? A “merger of equals” may be in the offing (though such deals between similar-size companies typically are acquisitions with both a buyer and seller). What about peers that regularly use acquisitions to grow? Before adding these names to your list, ensure that the buyers played fair with their previous sellers and successfully integrated the purchased companies.
Then there are buyers motivated by an “X” factor. If your sector is in high demand or your company has unique and desirable assets, you might attract private equity investors or companies outside your industry that are looking to get in.