As M&A advisors, we have seen many business owners miss opportunities that come to them during the course of their careers. We are also familiar with business owners who have sold their companies too early, leaving money on the table or not being able to find a new path for themselves after the sale.
Deciding when to sell your business is a nuanced decision. In this exploration, we’ll dissect the key considerations tied to the company’s lifecycle, economic conditions, state of the capital markets, your personal journey as a founder and industry cycle that should help you make an informed decision about the timing of a company sale.
1. Company Lifecycle
The company lifecycle is the first factor we consider in advising on the decision when to sell a business. Every business goes through distinct phases in its development – from inception to maturity and decline. The stage your company is in can significantly impact the timing of a sale and the possible outcomes.
By the startup phase, we understand a business that is only developing its product or service and beginning to see a market fit. Exiting during the startup phase may be opportune if you’ve proven your concept but lack resources for scaling (such as funding or sales channels). This can allow you to capitalize on the potential of your innovative idea while mitigating the risk of failure.
The main risk of starting a sale process in this phase is selling out too early, at a low valuation, and missing the potential future growth of the business. It is also the most difficult time to sell a company, as the risk is the highest. Additionally, valuing a company for acquisition at a startup phase is extremely difficult. Even though a lot of time and effort could’ve been invested in product development, a lack of solid financials allows only a select few companies to sell at this stage.
A business in its growth phase has already proven its market fit and is focusing on deploying its earnings or funds from investors to reach scale. For many business owners, it is a great time to sell because these businesses get the highest valuation multiples. However, it is extremely difficult to tell how far a business can go when it is rapidly growing. Very few entrepreneurs can sustain the rapid growth of their businesses for multiple years, so when you see growth rates in your business decline substantially from year to year with no reversal of this trend in sight, it is a signal to consider selling.
Maturity and Decline
Most companies eventually mature and decline when the initial momentum for business growth wears out, and the competitors begin catching up. Very few private businesses that go into this phase can turn things around and find new avenues for growth. From our experience, this is a stage in which time is of the essence, and postponing the inevitable decline is futile unless you can reinvigorate the business by hiring new top management or successfully launching new products. In mature phases or if the decline is looming, selling before potential stagnation sets in can be strategic.
Identifying the signs of maturity or decline and acting proactively can safeguard against diminishing returns from the sale. Mature businesses tend to fetch moderate valuations in terms of an EV/EBITDA multiple, which oftentimes makes selling unattractive if they can still be milked for profit for multiple years. However, it is very important to understand the risks related to holding on to the company in order to maximize the chances of preserving its value. In order to understand where your company is in the company lifecycle, it is worthwhile to consult with an M&A professional who will be able to assess your organization and the trajectory on which it is.
2. Economic Cycle:
The economic cycle plays a pivotal role in the valuation of a business. With few exceptions (e.g. debt collection), most businesses’ fortunes tend to correlate with the wider economic trends. Short-term financial performance plays an outsized importance in a business valuation, given that most investors tend to extrapolate recent outcomes long into the future.
A typical economic cycle has phases of expansion and contraction. During an expansion stage, most businesses grow faster than in contractions and have extraordinarily high profits. Conversely, during a contraction phase, business owners see their businesses shrink, and profits often turn into losses.
When timing a sale, it is best to sell during the expansion phase because that is when it is the easiest to build a great growth story for a company and present it in a good light. Because a sale process usually takes a few months, it is essential to plan it well in advance of the peak of the economic cycle because when improving sales numbers suddenly turn into dreaded drops in sales, the prospects of successfully selling a company decline substantially.
Selling a business during the contraction phase is an option that is sometimes unavoidable if the business is in distress or in dire need of funding. In these circumstances, however, the price you can get for your business will be substantially below what you would be able to receive during the expansion.
Understanding the economic environment can vastly help in improving your odds of getting a high valuation. An M&A advisor can help you understand how the economic cycle impacts the business valuation and help you with exit planning so that you sell at the right time.
3. Capital Markets Cycle
Capital markets (such as bond or stock markets) also go through cycles that are highly correlated with the broader economic cycles. However, because of the high impact of central bank monetary policies, capital markets have their own booms and busts that do not necessarily need to be justified by changes in the business environment.
Private company valuations correlate to a large extent with the capital markets. As a rule of thumb, you can expect valuations to be 20-30% higher than average during a boom in the stock market and 20-30% lower during a bust. Therefore, it is extremely important to consider this factor when timing a sale process. These cycles tend to be 3-7 years on average, which gives ample time to prepare. However, it would not be advisable to try to exactly time the sale to the capital markets, as this is elusive to virtually all investors.
4. Personal Lifecycle:
A good company sale is not only about financial and business goals. Personal goals are equally important factors in the decision-making process. Here we discuss a few, but every individual has his or her considerations, and thoroughly understanding them should precede an exit plan.
- Life Milestones:
- Consider personal milestones like retirement, family plans, or other entrepreneurial pursuits that could impact the timing. Aligning your business decisions with personal milestones ensures a holistic approach to your life and career.
- Succession Planning:
- If grooming a successor or planning a transition, coordinate the sale with your long-term personal and professional objectives. A well-executed succession plan contributes to the legacy and sustainability of your business.
- Founder’s Burnout:
- Assess your fatigue and passion. Selling during a burnout phase might be crucial for personal well-being. Recognizing the signs of burnout and acknowledging its impact on decision-making is essential. In many instances, we’ve seen founders go through phases of burnout and recover to be more productive in their businesses. Selling your business is one of the solutions to this problem but by no means the only one.
- Financing your new venture or retirement
- When considering selling your business, it is essential to make sure the proceeds from the sale will be enough for the desired lifestyle you plan to have. In particular, if you own a cash-generating business, you should be aware that the likelihood of reinvesting the proceeds at a rate of return you are accustomed to as a business owner may take a lot of work to attain. Therefore, protecting your future financial needs is essential to time the sale.
- Family considerations
- As a successful business owner, your decisions play an important role in your financial well-being and that of your family members. When considering the decision to sell, it is also important to consider how this will affect their futures and your relations. Often times we find that selling a business is a beneficial way of distributing the wealth between family members rather than splitting a business between
5. Industry cycle
Understanding the stage of the industry cycle is crucial for making informed decisions. A good framework to understand it is the Gartner hype cycle, which illustrates the cycle through which each innovation goes:
The Gartner Hype Cycle serves as a framework for understanding the life cycle stages of emerging technologies, from inception to widespread adoption or, alternatively, obsolescence.
- Innovation Trigger: This marks the genesis of a novel technology or concept, often accompanied by heightened attention from industry observers and early adopters. At this nascent stage, practical applications may not be fully defined. Selling a business at this stage is usually unlikely, given that very few buyers seriously consider this.
- Peak of Inflated Expectations: Subsequently, there is a surge in optimism and enthusiasm regarding the technology. Media attention and speculation tend to exaggerate its potential, leading to inflated expectations that may not align with the technological reality. This is when it’s easiest to sell loss-making businesses that hold a promise of rapid growth.
- Trough of Disillusionment: The ensuing phase witnesses a decline in interest and excitement as the technology encounters challenges and setbacks. Initial enthusiasts may face disappointment as practical limitations become evident. Selling a business at this stage may be less likely as fewer buyers look at it, and valuations tend to be depressed.
- Slope of Enlightenment: A more realistic assessment of the technology’s capabilities emerges during this phase. Lessons learned from earlier stages are applied, leading to a refined understanding of the technology’s practical applications. This is an optimal time to sell a business when its full potential is already visible, competition is still limited, and buyers perceive few risks.
- Plateau of Productivity: Ultimately, the technology attains a level of maturity where it undergoes widespread adoption. It becomes integrated into operational processes, delivering tangible benefits and achieving a state of stability in its utility. Selling at this stage has pros and cons; on one hand the business has achieved its full potential, but on the other, the industry’s competitiveness tends to increase, lowering the attractiveness to prospective buyers.
It is imperative to acknowledge that not all technologies progress through these stages in a linear fashion, and individual technologies may exhibit variations in their trajectories. The Gartner Hype Cycle offers valuable insights for organizations to prudently navigate the evolving landscape of emerging technologies.
Determining the right time to sell your business involves a delicate dance between company lifecycles, economic conditions, and your personal journey. By carefully weighing the considerations within each realm, you can navigate the complexities and strategically time the transaction for maximum benefit.
As you embark on this transformative journey, remember that the landscape of mergers and acquisitions is intricate, demanding expert guidance. Connect with experienced professionals to gain personalized insights and chart a course for a successful business transition.
If you’re contemplating the sale of your business, now is the time to take action. It is never to late or too early to prepare your exit strategy. Schedule a consultation to explore your options and maximize the potential of your business sale. Your future awaits – let’s navigate it together.