Business Owner Resources
When is the right time to sell my business or bring on a partner?
For some, owning a business is a lifelong endeavor. Founding, managing, growing and ultimately, exiting are all major milestones in the life of a business. The last two milestones – growing and exiting – can be incredibly challenging processes to undertake. For most business owners, the most difficult questions to answer are "When is the right time to sell the business?," or "When should I bring on a growth capital partner?" Unfortunately, the answers are anything but straightforward. There are, however, a number of indicators to consider as it relates to planning and timing a growth capital infusion or business sale.
How do I know when the right time to bring on an investor or sell my business is?
As advisors, we get this question often. The old stock market philosophy of “buy low, sell high” remains true for private companies. The easy answer to the question of when to sell or take on a capital partner is when the company is performing at its best. The company’s success may be the result of favorable industry and customer dynamics and/or macro-economic factors that serve as tailwinds for the business. Ironically, we often hear from business owners something to the effect, “I would like to sell my business, but things are going too well to sell.” Business is likely growing, making good money, experiencing strong customer demand, and has visibility to continued success. These are precisely the type of businesses that get valued the highest and are optimal conditions for a buyer or capital partner – thus selling high.
Again, the “easy” answer to the question is when business is at its peak, but it usually is not that simple. There are myriad other factors that can determine timing of selling or taking on a capital partner.
Overall Economic Conditions
One of the first factors to be considered is the economic environment – locally, regionally, nationally, and in some cases, internationally. Some businesses will be more impacted by what is happening in the local economy vs the global economy and vice versa. Some of the factors to consider are the following:
Cycle resiliency– How has the business fared during the good times or the bad times in the national, regional, or local economy recently? It isn’t necessarily the overall economic conditions that matter but how your business is performing in such economic conditions. For example, during the COVID-19 pandemic, the national and many regional and local economies have not been or are not performing well. However, businesses that have been largely unimpacted by COVID or benefitted positively from conditions the pandemic created are receiving higher valuations than they would have received per-pandemic. Buyers and investors typically pay premiums for companies that can perform through both good and bad economic climates, but you do not have to always perform well to be able to sell as many businesses are not completely cycle resilient.
Market valuations – Private company valuations are obviously a key driver in determining the right time to sell or taking on a capital partner. Public equities may provide some indication of what private market valuations are doing but private markets tend to not have as sudden shifts in value, up or down, as the public markets because there is less liquidity, or ability to sell in and out of ownership stakes in businesses, so valuation changes tend to change more slowly than public markets. Valuations will of course be different for each industry and for each company in that industry based on a variety of factors. However, valuation trends can be sometimes found in industry reports, through discussions with investment bankers that know your industry, or through general knowledge of purchase prices used in recent deals in a particular industry.
Industry Conditions
Another important factor to consider is what is happening in the industry in which you compete. There are several industry dynamics that must be considered:
Industry trends– Is the industry growing, shrinking, consolidating (more on this below) or changing in any way? Are there key technological or regulatory drivers influencing the market?
Industry competition– How is the competitive landscape changing? Material shifts in competitive landscape usually trigger M&A activity. The perceived winners are seeking to capture more market share by acquisition. Those that do not benefit from competitive shifts are left to evaluate whether they are better off exiting the business now before they lose market share to their competitors. In addition, the number of acquisitive parties in an industry will also impact timing. If there are a lot of private equity backed companies, which tend to be very acquisitive, as well as public companies that are making acquisitions it may suggest there will be a robust buyer pool.
Company Conditions
Company specific financial trends and key performance indicators are often the best representations of the health and preparedness of a business for an exit. Primary factors to consider include the following:
Business performance metrics – What are revenue, gross margin, and EBITDA (or net income) trends of the business recently and over the past 3 – 5 years? Revenue growth, margin improvement, and earnings growth are all important factors in the desirability of a business to buyers and ultimately impact the value of a business.
Customer profile – Does the business have any customer concentrations, where one or a few customers account for a large portion of the revenue or gross margin of your business? The less concentrated the better.
Future revenue visibility – If you are in a project-based business, do you have a strong or weak backlog of committed projects and/or pipeline of new project opportunities? Can you point to recurring revenue streams (contracts, customer retention, retainers, etc.)? The more visibility you have to your future revenue streams the less “risky” the business appears to buyers.
Management team – Have key personnel been with the company for a while or are most of them new to the company or the industry? Buyers outside of your current industry (as opposed to strategic buyers) are keen to a seasoned management team to invest behind, whereas strategic buyers are typically more receptive to buying a business with less than a complete or very experienced management team.
What it all means for your business
Every business is different, sellers’ objectives vary, and thus the decision when to sell or raise capital is unique to each business. We always encourage business owners and stakeholders to begin the planning process well in advance of the time they ultimately wish to complete a sale or capital raise. However, many times that isn’t practical for a variety of reasons and you have to weigh all the above factors. Virtually no business is likely to be able to answer every factor as a “positive” for selling. It requires weighing all the factors and seeing how many of the above factors are “positive” compared to how many are “negative” and thus do the positives outweigh the negatives. It can also be helpful to seek out an investment banking advisor, who specializes in M&A transactions, to help understand where your business would fall in each of the above criteria and determine when the right time is for your business.
