A few of the top questions we receive relate to the timing of the sale of a business. The first is, “Is now a good time?” The second one is, “How are market conditions?” These are the top FAQs.
The ideal time to sell is when the business is growing, there are no major issues with the business, sales and profits are up, the industry sector is good, the overall economy is doing well, and buyers are active and have money falling out of their pockets. The stars do not align very often, so it is difficult to time the market perfectly. For example, we all know owners who sold before the markets collapsed in 2000 and 2008. For every owner who sold at the right time, there are probably 10 who waited too long.
The two big questions to ask yourself are, “Is the business ready?” and, “Am I ready?”
To determine if a business is ready, here are some of the major items to check:
- Are sales and profits up for 2–3 years?
- Is your forecast positive and achievable for the next 12 months?
- Are gross profit, net profit and EBITDA margins steady or improving?
- Are there any customer concentration, key person risk, environmental issues or other risk factors?
- Are the financials in order, and how is the company’s financial reporting?
- Has the company kept up with investments and technology?
These are all major factors for achieving a good valuation for the company, as well as obtaining the best terms (cash at closing vs. deferred compensation) and ensuring a smoother sale process. The electronics industry in the 2010 to 2016 period has experienced unsteady growth, and few companies have seen 12 or more consecutive quarters of expansion. A top reason for deals to not get to the finish line is for revenues and/or profits to drop while a business is in the market. Even if the company has done well before going to market, it is important to maintain growth during the sale process.
Are You Ready?
The company may be performing well, and all of the company’s reporting ducks may be in a row, but the owner needs to be prepared for the process. Some of the key questions we ask owners are “What are your goals?” and “What are your plans post-sale?”
There are a few reasons why we ask owners these questions. First, we want to determine if an owner wants to retire soon after the sale, or stick around and help the company grow, as some buyers have different preferences. Second, buyers will ask the same questions, so it is good to see if the owner has a good answer prepared. Lastly, we like to determine if the owner has concrete goals post-closing. The process can be time-consuming, stressful, and lengthy, therefore, it is helpful if the owner has a clear goal in mind. Your advisors should help to make the process easier, but even the smoothest projects ultimately will have some bumps in the road.
Buyers and advisors all have stories of deals that fell apart at the last minute because the owner pulled the plug, often after spending significant time and money on the deal. Here are some questions to ask yourself before going to market:
- Am I ready to let go of the business?
- Do I have plans post-closing? (By the way, I hear golf gets boring pretty quickly…)
- Is my retirement plan in place?
- Have I talked with an estate attorney/tax advisor to set up any trusts or charitable donations?
- Do I want to sell and retire, or keep a minority stake in the company and help the buyer grow it?
- Are the stakeholders in the business (spouse, children, minority partners) ready for a sale?
- Am I prepared to speak with buyers who might call my baby ugly?
When buyers first meet or speak with an owner, they are assessing the business, but they are also trying to determine if the seller is reasonable and trustworthy. Even if you plan to throw the buyer the keys at closing, the buyer will still need to work with you for several months during due diligence. The buyer does not want to waste time and expenses working with an unprepared seller, so the better prepared the smoother the process will go.
Timing the sale of a business is key, but being prepared is critical. The well-prepared owner of a market-ready business can help ensure a higher valuation, better terms, and a smoother process at any time.
Tom Kastner is the president of GP Ventures, an M&A advisory firm focused on services for electronics and technology companies.