[Editor's Note: At a recent gathering of business owners and CEOs, the subject of timing to sell came up. One business owner offered that, with the election of Donald Trump, we could expect another 4 to 8 years of economic growth. He said that he was not going to consider selling his business at this time. While I did not counter his argument directly, I suggested that history tells us that in general terms business cycles are politically agnostic - the cycle does not care who is in the White House. I hope you find this article thought-provoking -dpm]
FACT: History tells us that this economic expansion cannot continue much longer. The last 3 economic expansions in the United States have averaged 7.9 years, the 7 expansions before those averaged 6.2 years. We are currently at 7.8 years in this expansion. While most economists expect 2017 and 2018 to be good years, a few reliable forecasters (and there are only a few economists who are reliable in forecasting) predict that the 2nd half of 2018 may usher in a downturn through 2019-2020. Whether that timing is precise or not, it is highly unlikely that we will see this current economic expansion continue for another 4 years.
Are you thinking you might be selling your business in the next 3-6 years? If so, then you may be surprised by the following: It is time to start the preparation process RIGHT NOW!
Selling a business can be one of the most significant events in the life of an entrepreneur. Not only is there a lot of emotional capital to deal with, but many business owners often have the bulk of their wealth and retirement assets tied up in the value of their business. Sell it for the right price and retirement is fantastic! Sell it for far less than you expect, and retirement may not be retirement at all. Sell it in the right way, and your legacy continues; sell it without forethought and planning, and your employees may be out on the street.
Today's sellers' market may be transformed into a buyers' market. The last few years have been an extraordinary time for sellers. Interest rates make borrowing for buyers inexpensive, and there have been many more buyers on the market than sellers. Competition among buyers for good companies is intense and sales multiples are at record high levels,
What most business owners don't realize is that there is a coming buyer's market for businesses. Here's why: there are a lot of Baby Boomer entrepreneurs who have built great companies and run them for 10, 20, 30 years or more. They are thinking about harvesting their investment and doing something else for a lot of good reasons. Some believe that they have met their financial retirement goals and they can back off, others have just lost enthusiasm, and some, unfortunately, have personal or family issues that preclude them from the continued necessary time and energy investments. Some have been advised that it is risky to have "all of their eggs in one basket", and want to sell a portion of their business to diversify their retirement portfolio. Many, including me, expected this bubble of sellers to occur before now, but with the stock market boom, changes in retirement age expectations, etc., this boom has not disappeared, it has merely shifted. (After all, none of us are getting younger!)
At the same time, the next generation of workers are very entrepreneurially focused themselves. They often want to start their own businesses rather than buy an existing one, even though the risk of failure is much greater. That means there may be fewer interested buyers for your business when you need them most.
Why think about it now? It may take longer than you think. If you plan to sell in several years, you have a lot of time to think about it, right? Not really. Most owners and CEOs of middle market companies may not realize that it can take 3 - 6 years to make the most graceful and profitable exit. At a high-level, the timeline can look something like this:
- Prepare the business for sale (18- 36 months)
- Locate buyers, negotiate the deal, and execute the transaction (6-12 months)
- Owner or CEO commitment to support the transition to new ownership (6 -36 months)
You can always "sell now, as is" if you want, but you may be leaving MILLIONS of dollars on the table by doing so. Preparing your business for sale today means that you will have a lot of flexibility as to when and how you execute the transaction.
Another critical reason to prepare your business for sale is simple: life happens.Any number of unexpected and unfortunate events can disrupt your operations and your plans, and frankly, the older you are, the more likely some of them are to occur. These nasty little possible surprises include:
- Dissenting Owners and
- Declining Markets
On the positive side of the coin, there are any number of wonderful things that might come your way, too, such as:
- An opportunity to purchase a competitor,
- A significant offer by a competitor or private equity firm,
- A great expansion opportunity, or
- A buyout offer from a partner.
If you are prepared for sale, then your company has a higher value to competitors, partners, private equity firms, and lenders. You will absolutely be in better shape to take advantages of the opportunities that come your way, too.
So here's the bottom line: if you want to sell your business on your terms, then you need to begin right away to run your business to increase its value and develop a business transition strategy.
Preparing your business to be ready for sale. In order to sell quickly and for a great price, you have to have exceptional value. And as with a private home, you will be far better off working ahead to prepare your business for sale.
When you stage a home for sale, you paint the walls, fix the roof, take out half of your stuff, landscape a little, and remove the personal distractions. You work with a real estate agent / broker to sell your home and you get out of the way. The process is disruptive, but hopefully only for a few months.
When you stage a business for sale, the process is dramatically different. You want to present a picture of healthy profitability trending upwards with a management team that will stick around after the sale. You need to communicate with great confidence that the customers and partnership relationships you have spent years developing will transfer to the new owners. And as with selling your home, you need to get out of the way - the new owners need to be convinced that the business will operate smoothly without you.
In summary, the five things that most purchasers look for are:
- A solid performance history
- A capable management team
- A great growth story, including recent steady growth and strategic growth opportunities
- Consistently improving cash flow and EBITDA
- A smooth and thoughtful transition plan and no due diligence surprises
Unfortunately, the sales process is often disruptive to the business. Handled poorly, it can take months and you may lose valuable customers, momentum, and employees. The more carefully you plan for the transition, the less time it will take and the more business value and momentum you will maintain.
The Mead Consulting Group has been helping middle market companies for over 20 years to add value and prepare for a successful transition. Our clients have consistently enjoyed better results. Investment bankers have told us that our clients are among the best prepared that they have seen.
If you would like to discuss how we might help your company begin the process of adding value and being better prepared, please contact me.