Personal Finance

Selling Your Business: Why You May Be Waiting Too Long

If you are a business owner, you likely spend much of your time immersed in the details of your business—meeting with customers and prospects, running the day-to-day operations, managing employees, and developing strategies for the next phase of growth. Like many business owners, however, your end game might be the successful sale of your business.

If so, selling your business is one of the most, if not the most, important financial decisions you will make in your life. It is not only a financial decision, but a very personal one, and the outcome typically impacts a large number of people. Many factors will influence a business owner’s decision to sell, but one factor above all may be the most important factor to consider—the timing of the sale. This, of course, begs the question: When is the right time to sell your business?

Timing Matters
Many business owners plan the timing of the sale around reaching key performance metrics (i.e., revenue or profits) or as a result of personal or subjective influences (i.e., the desire of a spouse to spend more time together in retirement).

Business owners may cling to any number of reasons to delay the sale of their business, including:
• “My business is generating real forward momentum; I’d like to revisit selling when growth starts to plateau.”
• “I’ve made investments in my business and I intend to realize the full value of those investments.”
• “I have a solid business, but there are initiatives I want to implement to make it more appealing to potential buyers—that is my focus right now.”
• “Right now I’m too busy running my business to even think about selling it!”
• “I don’t know the first thing about how to sell my business or what the process entails.”

The reasons listed for delaying a sale are all understandable. However, if, like most business owners, your primary objective is maximizing the value of your business, you need to understand the answer to the question, “when is the right time to sell your business.”

What Determines the Value of a Business
The value of a business for sale is driven by three factors:

1. Company Performance
2. Current Economic Environment and Industry Dynamics
3. Current Capital Markets Conditions

On his or her best day, a business owner can control only one of the components of what drives value—company performance. (In actuality, there are many days where owners don’t actually feel much in control of anything!)

So What Does this Mean for Business Owners?
Waiting to sell may be the wrong answer if the then current economic, industry, and capital markets conditions support high valuations. Are you paying attention to the most important factors that are impacting value even though you can’t control them? Are you missing out on a seller’s market?

Figure 2 highlights the relationship between interest rates, public equity markets, and transaction valuations. Over the past 20 years, there is a clear correlation between lower interest rates, strong stock market performance, and high transaction valuation multiples for privately held businesses. You will note transaction valuations climbed to multi-year highs in 1999, 2007, 2014, and 2017 along with stock market performance. Each of these highs followed periods of stable or declining interest rates.

Another positive contributing factor is the amount of debt (credit) available to fund acquisitions. More debt has historically been available to fund acquisitions during a seller’s market, effectively allowing private equity firms to compete with strategic acquirers during the sale process, yielding more competitive sale processes and higher valuations.
Figure 3 notes the close correlation between leverage and valuation multiples in reported private equity transactions. Again, the 2006–2007 and 2015–2018 markets stand out in terms of availability of debt and its significant impact on valuations.

Establishing Your Exit Plan
Understanding and paying attention to each of the three value drivers that can align to create a seller’s market will allow you to identify the most attractive time to sell your business.

There is no concrete formula for determining the right time to sell, but it is important to understand what factors will affect the value of your business—factors you can influence and control, and equally important, those you cannot. Seller’s markets do not last indefinitely, and often the “window” to sell closes rapidly and without warning. For example, a decision by the Federal Reserve to raise interest rates could portend a closing of the current window, or, conversely, positive economic trends could continue to push equity markets higher and extend the seller’s market. These factors ultimately may have more bearing on the outcome of the sale of your business than your revenue or profits.

Don’t risk waiting too long to sell your business because you think the business “isn’t ready.” By understanding all the factors that influence the value of your business you can more confidently select the “right” time to sell.

We are here to help. Contact us today for advice and guidance in determining your company’s value and an effective succession plan to fit your needs and goals.

Stephen Gaines
Managing Director, Head of Business Services Investment Banking

Prior to joining Janney in 2018, Mr. Gaines was the Founding Partner and a Managing Director of HighBank Advisors, a mid-market investment bank and advisory firm. He possesses over 25 years of financial advisory experience covering the full range of advisory services including mergers, acquisitions, divestitures, financings, strategic assessments, board advisory assignments, restructurings, valuations, and dispute services.

Steve has served as lead banker on more than 100 transactions, with an aggregate value over $1 billion. Prior to joining the financial advisory industry, he worked in the secured lending division of a multi-billion dollar regional bank. He has been featured in global and national media outlets including BBC World News, CNBC, Fox Business News, Wall Street Journal, Investor’s Business Daily, Buyouts and Acquisitions, and Financial Week. Steve holds an M.B.A. from University of Maryland, and a B.A. in Economics and Political Science from Dickinson College.

Janney’s Investment Banking practice is a leader in middle-market M&A and financing solutions for public and private companies. They place a high value on their consistent track record of delivering solutions to clients. Since 2009, Janney’s Investment Banking team has completed 605 transactions aggregating $85B in transaction value, working with clients on a highly-personalized basis, providing exceptional service, commitment, and senior level attention.

This is for informative purposes only and in no event should be construed as a representation by us or as an offer to sell, or solicitation of an offer to buy, any securities. The factual information given herein is taken from sources that we believe to be reliable, but is not guaranteed by us as to accuracy or completeness. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation, or needs of individual investors. Employees of Janney Montgomery Scott LLC or its affiliates may, at times, release written or oral commentary, technical analysis, or trading strategies that differ from the opinions expressed within.

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