When to Start Selling Your Business

Posted on June 2, 2008

Most CEOs don’t start thinking about selling their business until it’s too late. This piece explains why you are better off planning for a sale when things are going well.

I just finished meeting with a new client that has decided to sell their business. They’re a very small firm run by husband and wife, now in their mid-70’s. After 40 years, the husband “burnt out” a year ago, and effectively retired. The wife, whose focus was always operations, kept things running as best she could. Sales had been dropping for the past three years at about 10% per year, but in 2007 they seemed to be dropping in half. Unable to cover their monthly nut, they borrowed on the line of credit, and decided it was time to sell.

The decision to sell was made about five years too late. Deciding to put the business on the market is not the starting point. It is nearly the ending point.

When to start thinking about selling

• Think about selling your business when things are going well. Businesses get a lot more value when the trends look good – like 2-4 times the price compared to a declining business.
• Think about selling when you have plenty of energy and interest in the business. It can take two years to sell, and then another year or two after the sale to get all your money paid out.
• Buyers look at the past three years’ history. You’ll want to show them sales and profits growing consistently quarter by quarter. So if you start the selling process three years before you plan to market the business, you’ll watch expenses really carefully each quarter, matching them to revenues so that you have a good-looking bottom line that grows over time.
• You’ll reach out to prospective buyers in your industry that you think might really want to buy your business. You won’t tell them you’re planning to sell, but you’ll develop the relationship. Maybe you won’t sell inside the industry, but knowing these people never hurts. And you might even talk to some people who might represent you in your sale to get to know them and assess whether they are the right sort. They should be happy to give you some candid advice and help to guide you in preparing the business for sale. Choosing the right person or firm to help you sell is a big, critical decision.

What am I left with in the case of my elderly client? A financial buyer from outside their industry is impossible. The business is losing money. The only hope is an industry insider that wants to buy a company for a relatively small amount of money who believes they can turn the business around.

Ideally, my client’s operations can be moved into the buyer’s operation without increasing their overhead at all, so they should be able to make some money off the increased volume. The bad news is that the number of interested buyers will be much smaller than it would have been, and the likelihood of two or more buyers competing (bidding) for the business will be low.

On the other hand, what if, after three years of preparing the business for sale, you decide not to sell? Was it all a waste? Your business will have consistent, steadily growing profits (or at least as close as you were able to come). Your top line sales will be growing and will seem to be predictable. Frankly, sale or no sale, this is a picture of health for any business.

Takeaways:

• Start thinking about selling your business when business is still good.
• Establish a three-year history of steady growth and start connecting with future suitors.
• If you change your mind, you’ve still made your business more efficient.