The fundamental strategic decision for selling a business is: “Hold and grow, or sell and go.”

The old adage that “timing is everything” is never truer than when it comes to selling – or not selling – a business.

As respected mergers and acquisitions advisor (and my IBG Business colleague) Bob Latham notes, “Owners rarely sell too soon, but too often hold on too long.” He observes that the fundamental strategic decision for selling a business is: “Hold and grow, or sell and go.”

Examples abound of owners who held too long and lost. All too often, the onset of a debilitating disease, such as dementia, leads to misery as families and employees suffer both the progressive decline of the owner’s health and the protracted demise of great businesses. At the age of 67, one robust owner expected to build his beloved business for another decade. Overnight, illness put him in ICU for months prior to an untimely demise. His vibrant company lost its rudder, and its value to his heirs fell precipitously.

No company is immune from unexpected and uncontrollable market fluctuations. One needs to look no further than a major oil-price bust to see the catastrophic effects that outside factors can inflict on once-solid businesses. Also, scores of businesses have become “unsaleable at any price” in cycles when new loan-underwriting mandates are imposed or acquisition loans dry up almost overnight. Under the wrong conditions, the value of a great business can tumble rapidly, inflicting a terrible impact on the owner’s net worth and estate.

A key entrepreneurial skill is recognizing when to build the owner’s estate by holding on to the business, as opposed to capturing higher value by selling. While the right time to hold tight or to divest is rarely obvious, wise business owners can help optimize value and avoid worst-case scenarios by proactively doing two things: checking their health and scanning the horizon.

Health Check

Prudent owners keep a close eye on their health. They know that, at some point, every business inevitably changes hands, so they weigh their personal situation as a key consideration on the right time to sell their business.

Advancing age, health problems, fading energy, the need to secure a liquid estate, and reserving time to enjoy life after business are key factors. Early recognition and seeking expert input from professionals who manage business sales and transitions is wise. For many reasons, of all the succession options, selling a business while it and the owner are healthy is most often the best choice for maximizing the owner’s net worth and estate value.

The time for major business decisions is not after waiting too long. It is amazing how many otherwise great business owners make that big mistake.

Horizon Scan

Even a healthy and growing business is subject to losing much or all of its value due to changing outside factors. Those other variables – often unexpected and unpredictable – make it essential to logically consider what might cause values to rise or drop. A good owner manages growth and profitability, but unanticipated market changes can easily trump great management and crush the value of the business. Strategically scanning the business horizon helps a smart owner avoid being blindsided in considering the best time to sell.

As with health screenings, attention to a handful of variables is key. Interest rates, for example, can have a huge impact on business value. Declining interest rates increase business value; conversely, increasing interest rates drive value down. Inflation rates and money supply are also critical factors. With plentiful purchase money available, as today, values may remain high. Conversely, if interest rates or inflation were to continue to complicate acquisition decisions, or if equity funds should return to more normal levels, business values could be driven much lower.

The “Business Value Drivers” table below identifies some of the main factors that can either increase or decrease business values.

BUSINESS VALUE DRIVERS

Factors that drive business values up:

•   Steadily growing profits
•   Steady or growing markets and sales
•   Recurring revenue streams
•   Low concentrations of customers
•   Strong non-owner management teams
•   Stable ownership / management
•   Improved health: focus, stamina, energy
•   Interest rates go down
•   Income or capital gains tax rates decline
•   Inflation moves lower
•   Larger pools of aggressive buyers
•   More money supply
•   Economic strength and increased confidence
•   No litigation or regulatory issues

Factors that drive business values down:

•   “Down years” with declining or unsteady sales or profits
•   Cycles: crashes/recessions, competitive change
•   Concentration of customers
•   Low recurring sales
•   Non-owner management is lacking
•   Owner/management instability
•   Mortality: age, illness, death, probate, dissention
•   Interest rates go up
•   Income or capital gains tax rates increase
•   Inflation moves higher
•   Diminishing pool of aggressive buyers
•   Lowering money supply
•   Weakening economy or reduced confidence
•   Litigation or regulatory issues occur

Good News

Many owners are surprisingly uncomfortable looking beyond their company’s shell to seriously evaluate a strategic sale option. Staying within this comfort zone is a serious omission and can create major unintended consequences.

We cannot accurately guess the timing of changes in the key drivers on business values. Nevertheless, to get maximum value from owning a business and for its owner’s estate, it is essential to know the impacts on values that are certain to follow from forces of change that will push business values up or down. Failing to weigh these drivers undermines an owner’s ability to choose wisely when trying to maximize their net worth and estate.

Fortunately, there is much good news to share. For any business owner contemplating a sale, expert help is available. Professional M&A brokers and advisors know how to assess value and the owner’s options, and they will have closed scores of successful transactions. Based on experience with the market dynamics, top M&A professionals can help virtually any owner overcome their discomfort to make sound business sale decisions. A refined M&A sale process confidentially creates competition among buyers and delivers top values to owners at the lowest levels of risk, stress, and distraction.

Today’s mid-market business valuations generally favor sellers: Consistent with the factors noted in the above table, there is currently abundant acquisition money, high economic confidence, and moderating inflation. There is also strong competition among well-funded buyers of quality companies. Buyers know they will have to pay to play.

At the time of this writing, all of these variables enhance the current seller-friendly environment, prompting many owners who have been inclined to wait to look closely at selling their business while the strong sellers’ market lasts.

Favorable conditions today are not assured to last beyond tomorrow, as market values of businesses cycle up and down. “This too shall pass” applies to today’s high business valuations. It is known that scores of Baby Boomers and other long-time owners will be exiting their businesses as they “age out” of their prime ownership years, and this trend will swell going forward. As these large numbers of businesses come to market, we expect a shift from today’s sellers’ market to tomorrow’s buyers’ market.  Timing is everything.

Smart owners recognize the situation. They do their homework, visualize coming change, and seek the help of an expert M&A professional in deciding when and how to sell their business.

Over our long history, IBG Business’s 1,200-plus well-timed deals have a closing rate more than three times the national average for our profession. To start the process of preparing your business for a successful sale, contact an IBG Business M&A professional near you.