Selling your business is an important decision. It’s a turning point in the life of any entrepreneur. Identifying the right time to sell is not easy. For many entrepreneurs, the business IS their life. Separating from it is emotional fraught with personal risk. That said, the company is an asset. And, like any asset, we need to think about when the time is right to sell it. Is the time right when the entrepreneur feels ready to part from the business, sell it at a reasonable price, or when taxes on the sale will be lowest? Is there a perfect time and, if so, how do we define it? Let’s find out.
The Right Time to Sell: A Myth?
It seems evident that when you want to sell your business, the goal is to make a hefty profit either by selling it at a high price or by avoiding high taxes.
Predicting when the company will reach its maximum value is complex, if not impossible. That moment happens almost by chance: it is always possible to say that its value will increase without that happening. Timing also depends on the economic policies put in place by successive government administrations.
Is the right moment a myth? No, the right time is a more abstract and personal concept.
Typical Reasons to Sell a Company
Reasons for selling a company are as individual as the entrepreneurs and their companies themselves. They may span personal, strategic, or financial issues, unfavorable circumstances, and other factors. Ultimately, there are generally three dynamics that prompt owners to sell.
Market and Competitive Changes
- Market trends: If a business model is based on a trend that is ascending, about to peak, or has just reached its peak, it may be an excellent time to think about a sale.
- New regulations: New regulations, such as environmental laws or consumer protection regulations, can result in significant investments in implementation that sometimes kill a company’s profitability. If these regulations harm the core business, a sale is often more worthwhile than an adjustment.
- Market entry of substantial competition/intensification of competition: Your own company has succeeded within its market niche, which results in the entry of new (larger) competitors and consolidation of the market. When this happens, small and medium-sized companies often realize that they can no longer compete.
- Change of location/globalization: Many markets are not subject to the restrictions of geography. For companies in those markets, the impetus of expansion and globalization poses significant organizational, intercultural, and financial challenges they cannot master on their own.
- Declining profitability: This is a common sign of reduced competitiveness, poor products, and services, or an untenable business strategy. As a result, virtual sales channels are often lost, and competitive strength dwindles. New ownership brings new perspectives, methods, and energy to revive the company.
- Capital requirement: To remain competitive, a capital increase is often necessary. The sale of company shares creates new capital for essential investments.
- Internal conflicts of interest: The consensus of existing shareholders becomes increasingly divergent and paralyzes the company’s development. One possible solution is to bring in new shareholders.
- Concentration on the core business: From business units that don’t fit the company’s product or service line(s) to bloated departments that hinder efficient operation, a lean corporate structure demands what’s unnecessary to be split off. As a result of the separation, liberated resources can be used to strengthen the core business.
- Lack of succession planning in owner-managed companies: This frequently happens in family businesses. Maybe the family transitioned from 1st to 2nd generation, but there aren’t any 3rd generation family members in the industry or interested in taking the helm. In this case, ownership frequently needs to look outside.
- Disinterest/new beginning: Over time, shareholders’ interests in specific business models or industries can change, and new opportunities arise. The sale of the company represents new start-up or development capital to fund newly discovered interests or side projects that gain strength and require more time and energy.
- Retirement: This, of course, is the most obvious one. You’ve built your business over 20-30 years, and you’ve decided it’s time to retire and move on to other things.
The Right Time to Sell Your Company
The sales process can exceed 12 months, and appropriate preparation for a profitable sale is essential. Nevertheless, entrepreneurs often hesitate too long because they lack M&A knowledge or there is still too much uncertainty about the next phase of their life. Long delays can cost money and damage the company’s future competitiveness. Such development inevitably leads to a reduction in the company’s value and sale price.
Related: How to Sell a Distressed Business.
Time and Professional M&A Expertise Are Critical
Whatever the circumstances that lead to the decision to sell the company and the right time, professional preparation and support are among the essential success factors of a company sale. After all, choosing the most suitable investor ensures the company’s future and achieves the highest sales price.
Mixing Private and Economic Factors
Selling a company is always a subjective and individual decision. Often personal reasons outweigh economic reasons and should be given sufficient consideration.
In our experience, owners often hesitate far too long and sometimes suppress the intention to sell for an extended period. The stress of day-to-day business, the hope that the children or long-term employees will take over the company, and the uncertainty about what happens after the company is sold are common and plausible reasons to postpone the decision.
In many cases, the delay costs real money and does not serve the company’s (or the owner’s) best interests. When an entrepreneur sees the sale of her own company approaching, the basis for decision-making often shifts.
Investments are postponed, made to a different extent, or not made at all. New sales channels are not opened up, and new paths are left to future successors. Growth and expansion no longer occupy top priority, as the future seems uncertain.
In most cases, the company value diminishes in this phase, as the owner’s motivations and interests differ. Initiating a sale immediately is not the best solution in all cases. Nevertheless, in many cases, it can mean the creation of options and possible solutions. One day before the signing of the company purchase agreement, you may decide whether the company sale will ultimately be carried out. However, we have rarely seen that entrepreneurs decide against selling a company. In retrospect, many owners regret not taking this step sooner but are pleased to begin a new chapter in life now.
When it comes to selling your company, the following three factors are crucial:
- The entrepreneur’s motivation
- The development of the company
- External factors such as current market developments.
Bringing the sales process in line with these aspects can significantly contribute to a smooth process, a higher sales probability, and better conditions. This requires thorough and professional preparation.
The most common reason to concern oneself with corporate succession is retirement. However, we are also increasingly seeing entrepreneurs who decide to sell earlier than the usual retirement age because they want more time for family and hobbies after years of hard work.
Unfortunately, less fortunate personal circumstances such as illness also force the entrepreneur to sell. The need to minimize your risk and get money behind the proverbial firewall sometimes triggers a sale, too. It is not uncommon for an entrepreneur to act opportunistically and sell because he has just received an attractive offer for his company.
Factors from the Company’s Point of View
The economic development of a company can be an important driver for the right time to sell. Suppose customer orders collapse; there are difficulties with corporate financing. If a competitor threatens the business or the industry changes beyond its capacity to adjust, then it may be advisable to sell the company. Of course, this would likely be a distressed sale, and the value might not be what you’re looking for.
Even if the company is very successful, it can make sense to look for a new owner. A buyer may have more resources and know-how to scale the next growth stage or expand into new markets. Maybe it’s as simple as opportunity beckoning. As a rule, you will achieve a better price in a period of success rather than stagnation.
The general market environment can be very important for the timing of a company’s sales. In a positive market environment and under favorable political conditions, investment decisions are made faster and easier.
Current low-interest rates favor acquisitions because buyers and investors are looking for takeover opportunities. Your advantage may be that you can choose the most suitable offer from several offers in a structured sales process.
The Right Time, Unique to Each
Only the business owner will know the right time to sell. This will be the moment when they want to part with the business. For an entrepreneur, selling the company amounts to parting with a large piece of their life. Therefore, the right time to sell the company is when the entrepreneur is ready, when they know what they’re going to do next and when they’re ready to move on.