When marketing a business for sale you will want to get the best result possible. So when is the best time to sell so as to achieve the best realisation of the value of a business?
When Should You Sell?
You are likely to get the best price for your business at the point when its growth prospects appear highest. The growth prospects of your business will appear best when:
– your company’s business is growing (has been growing strongly and has prospects of strong future growth);
– your industry is growing; and
– the outside economy is growing.
Ideally therefore, you want to be selling at a time when your performance is good and your prospects are better.
It is a fact of life that many entrepreneurs are attracted to high growth industry as an expanding market offers easier opportunities to create a new business. What you must bear in mind however is that every high growth industry eventually settles down to a much lower rate of growth which cannot support new entrants into the market and often cannot support all of the existing players. Therefore many sectors, from skateboard shops through to nursing homes, golf clubs, and mobile phone shops, will show periods of high growth with large numbers of players entering the field only to have a ‘shakeout’ as the rate of growth declines and the less successful players go to the wall.
In buying your business, purchasers will be putting a value on the prospects of the business.
When picking your moment to sell therefore, it pays to ‘leave something in it for the next man’. Remember that selling a business is a process that will take some time. Many entrepreneurs are tempted to hang on into a growth industry, attempting to squeeze every drop of growth out of the business and aiming to sell right at the top of the curve.
The danger with this approach is that you just might be very lucky and sell out at exactly the right time. However, bear in the mind that the sales process will take several months to complete, from start to finish. The chances are that you will not be successful and will miss selling right at the peak.
The point to note here is that the value of the business sold when it is on the up in a high growth phase is likely to be much greater, or as great as the value of the business sold at the peak as growth starts to tail off, because the business during the growth phase will be being valued on the basis of continuing growth as perceived in the marketplace; whereas the value of the business as the market flattens out may be valued on greater absolute earnings, but potentially at a much lower multiple due to lower growth prospects.
Moreover, if you wait too long in the business’ lifecycle and the market starts to decline, the value of the business will be based on a deteriorating growth prospects which will be reflected in the multiples achievable.
You should review your business every six months or so and consider whether now is a good time to sell. In fact, asking yourself the question: ‘Would people want to buy my company?’ is a good test of whether you are generating value or not. Because if the answer is ‘No’, what does this tell you about your business?