Timing is critical when planning an exit strategy, and business owners must consider several factors.
In our 26+ years of assisting business owners in their exit planning, “when is the right time to sell?” is a question we hear all the time. But from an owner’s standpoint, this could be tricky to predict. Is it when you are near retirement age? Or is it when you have found a good person to step into your shoes? While these are important considerations for when to sell your business, one of the most important factors is the company’s financial state: you want to sell your business when things are going well.
Through most of our interactions with business owners, we know this concept feels counterintuitive. If your business is doing well and growing, you may think that if you wait a little longer, you will be able to sell it for even more. Unfortunately, that thinking has landed many sellers we know in a very regrettable place.
The first step to determining when to sell your business is identifying if the company is ready to sell. As we mentioned, the best time to sell your business is when it’s doing well: the financials trend upwards, sales are booming, the team is strong, and demand is high. It can be difficult to walk away when the business is doing so well, but that’s the exact time we recommend planning your exit. Buyers do not want to invest in a declining or suffering company. Not only will the business sell for less, but you may have difficulty getting financing approved or finding a buyer willing to take a chance.
The following are four telltale signs that your business is in the right place to begin planning your exit.
When to Sell Your Business: Look for These 4 Predictors
1. Financial Incline
Professional business brokers will use your last three years of tax returns, balance sheets, and profit & loss statements to calculate the value of your business and determine a sales price. Generally, the most recent year is more heavily weighted than the oldest year, so when your business is on a financial incline, your ultimate sales price will be higher. Three years of steadily growing financials also show buyers that your business is forecasted for future growth. If you have seen an increase in your numbers over the last three years, we recommend getting a valuation on your business so you can begin planning for the future; you never know what unforeseen circumstances could affect your business.
2. Strong Staff
Building a team takes time, so having a solid team of staff in place with experienced, tenured professionals and loyal managers makes all the difference when selling a business. Your staff is often a significant selling point during the marketing phase, and if you currently have a strong team that operates your business like a well-oiled machine, the company is ready for the sales process.
3. Diversified Client Base
High customer concentrations are one of the most commonly seen deal-killers in the M&A world, so if you have been working hard to diversify your client base, you are on the right track. A good rule of thumb is to ensure that no single client accounts for more than 30% of your sales. If you find that this is happening, we recommend taking action immediately. High customer concentrations can severely limit your buyer pool due to risk and can also make it difficult to secure financing. On the other hand, if your client concentrations are in line with the “30% or less” rule, the timing may be right to sell your business.
4. No Impending Capital Expenditures
Every business has capital expenditures from time to time, but you’ll want to get these out of the way if you plan to sell soon. No buyer wants to walk into thousands of dollars in expenses on Day One. Handle these expenses before the sale, and watch your buyer pool and sales price increase.
We cannot tell you how many times we have valued a company at a desirable price, but due to a recent influx in business, the owner decided to wait to sell. Then, a year or two later, the owner feels ready to sell, only to find out their business is worth less than before. What happened?
Often these business owners were struck by unforeseen circumstances, such as the loss of a key customer, a change in their health, or an unexpected economic downturn. After working with over 800 business owners during the sale of their businesses, we understand the heartache of this situation and how frustrating it can be after so many years of hard work.
When you decide to obtain a business valuation, contact us here at Viking. Understanding these key predictors is essential to making the right decision for you and your business, and we are here to help.