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CEOs

When Is Really the Right Time to Sell Your Business?

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“It’s always a great time to sell!”

At some point in time, every business owner or operator will hear this phrase from investment bankers, M&A advisors, and business brokers. In other cases, business owners may find themselves independently contemplating selling their business and cashing out.

The reasons business owners start thinking about selling their companies are as varied as the companies themselves. Regardless of the instigating factor, owners should take a step back and conduct a holistic assessment of whether or not it truly is the right time to sell.

Changes in ownership are inevitable throughout a business’s lifecycle. When planned for and managed well, the transition can reinvigorate and renew a company’s mission, culture, values, and productivity. When mismanaged, however, a change in ownership can destabilize financial performance, erode competitive market advantage, shake employee and investor confidence, and damage company culture.

Using a mix of best practices focused on leadership development, practical preparation, and rigorous assessment of the underlying fundamentals of a business — both internal and external — and its current management improves the chances that an ownership transition will create value, rather than diminishing it.

There is a distinct contrast between a carefully planned transition and one made amid corporate distress. A company’s readiness for and approach to exit planning is most noticeably put to the test in times of crisis and abrupt industry changes. Whether a business is being sold at the end of a long-planned transfer or quickly being sold during a troubled time, CEOs can enhance the process by concentrating on preparation and assessment.

Evaluate Your Company’s Fundamentals

Closely examining your company’s business fundamentals in the years and months leading up to sale will help you more easily determine when is the right time to exit.

Leadership: Do you have the right people in the right positions to lead your company to the next phase of growth under the new owners?  Prospective buyers will assess the executive leadership in the same way they would the selection of a new leader for any company.  Before putting your company on the market, ask yourself whether your company’s leadership is strong enough to withstand the scrutiny.

Value protection: Now more than ever, businesses in every industry need to find innovative solutions to challenges brought about by disruption in the forms of new technologies, evolving business models, and ever-increasing customer expectations. In the post-2007, low-growth world characterized by frenetic change, potential buyers consider innovation a necessity.

Innovation: Before you sell, work to foster a culture of innovation. At the end of the day, successful innovation is not the result of luck or lone genius — rather it is the result of a disciplined, continuous improvement process with an unrelenting focus on creating the highest customer and shareholder value. Carve out time outside the day-to-day demands of deadlines and budgets to focus on strategy and exit planning.

The Three Determining Factors

At the highest level there are three critical factors that inform whether or not it is the right time to sell.

1. Ownership has a highly compelling reason to exit the business.

In some cases, the current ownership may have personal reasons to exit such as irreconcilable differences between the co-owners, lack of an heir, or health problems.

Other times, owners simply need to pull liquidity out of a business to invest in an emerging opportunity. Or ownership may decide that the risk associated with that business is too great. Investment criteria can also play a role if the business isn’t performing in line with the owner’s desired rate of return.

2. Ownership is fairly confident their strategic goals will be met through a sale.

This may depend on current industry multiples or other market factors outside of the owner’s control. But in some cases, ownership and the business’s executives can play an instrumental role in increasing the probability of success, by a) valuing their company at or near a realistic number and b) employing a diligent and thorough process in marketing the company.

This is possibly the most important factor when deciding if it is the “right” time to sell, and is related to several external factors:

  • Overall performance of the global, national, regional, and local economy
  • Idiosyncratic risks/outlook associated with that industry
  • Individual company performance relative to overall market performance
  • individual company performance relative to its competitors
  • Socio-political and regulatory environment

3. Ownership is mentally prepared to divest.

Are you ready to exit the business you’ve worked so hard to build? Ambivalence on this front may negatively affect the exit planning process. To prepare yourself for divestiture, think about what you will spend your time doing after you’ve exited the business, and be realistic. If you’re used to working 12-hour days, and find satisfaction in your work, you may not enjoy constant relaxation as much as you think. You might plan to start a new venture, or dive headfirst into a passion that was formerly a hobby. Perhaps you’ll spend your time travelling. Whatever it may be, crafting a plan will help make exiting your business easier.

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