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When Selling a Business, Timing is Everything....and the Time is Now
Posted by B2B on: 2006-04-05 10:49:41
When Selling a Business, Timing is Everything....and the Time is Now
David McClure & Lawrence Schwimmer
Like the adage in selling real estate-"location, location, location"-there is one word that captures the three most important concepts in successfully selling a business for maximum value: "timing."
When selling a business, timing is critical. More to the point, the time to start thinking about a sale is now. Here's why:
The Wisdom of Timing
The ideal situation is to sell when buyer interest is strong. However, you can't assume that a buyer who is interested today will still be interested in two years. Buyer interest fluctuates with interest rates and a variety of external factors. Case in
point: the technology industry.
Buyer interest spiked during the height of the technology boom in 2000 then fell with the declining value of many technology firms. A resurgence in buyer interest over the past few years has brought more sellers to the marketplace. But making the decision to sell isn't always easy.
Personal vs. Financial
Selling a business is an emotionally charged decision for many owners, making it difficult to separate business from personal issues. This leads many owners to sell when they are ready, as opposed to when market conditions are the most favorable.
Company Growth: A Catch-22
The fact is many business owners do not want to sell when their business is growing. Ironically, this is often the point when the company will be worth the most to premium buyers because these buyers are looking for growth opportunities. Naturally, revenue and profit growth are encouraging and may delay thoughts of selling. But should you wait?
The Cost of Waiting
Most experts advise selling when the market is ready. There are some business owners who, when presented with a good deal, would sell immediately. Those who choose to wait should be certain they are not making the assumption that value is a constant.
History has shown that value does not always hold steady and fortunes change. Many industry sectors, including technology and telecommunications, have lost significant value over the past few years. It is not wise to assume that what has value today will have a particular worth in the future. The cost of waiting could be significant.
In the Interest of Time
Three critical factors are currently driving timing considerations for both buyers and sellers. The result has been an increase in momentum in the global M&A market.
1. Favorable Interest Rates< Interest rates can have a significant effect on selling prices. With U.S. interest rates currently near historic lows, deal values of late have steadily risen. The reason is that buyers can more effectively and cheaply access capital for business purchases.
2. Strong Euro versus North American Currencies With the current strength of the euro, a North American acquisition is more appealing to European buyers. In 2002, a $10 million deal ($16 million Canadian) cost $11 million. Today, that deal would cost about $8 million.
3. Reduced Capital Gains Rates Buyers aren't the only ones benefiting from economic factors. North American sellers also benefit from a change in tax codes. In the U.S., the Jobs & Tax Reconciliation Act of 2003 has temporarily lowered the maximum long-term capital gains rate (on assets owned for more than a year) from 20% to 15%. In 2000, the Canadian capital gains inclusion rate was reduced from 75% to 50%. As a result, an owner will net more from the sale of his or her business. For U.S. business owners, timing is essential as there currently is talk of the capital gains tax increasing in 2008.
How to Prepare for Opportunity
. Market Research: An Ace in Your Pocket
The key to unlocking and increasing strategic buyer interest is market research. Consider this: The value of a business is not based on its past or present. Strategic buyers are interested in what a company can do in the future. For example, the research may document simple methods to expand a customer base and, as a result, increase revenue. If you can document a company's growth potential through market research, you will be in a much stronger negotiating position.
. Create an Exit Strategy
Many owners have developed business plans but, surprisingly, many do not have an exit strategy. A sound exit strategy will enable an owner to assess a wide range of critical factors. It's also a tool to analyze an owner's options to ensure he or she sells at the right time. Without this type of plan, owners may find it difficult to determine whether to proceed with the sale process immediately or hold and grow the business.
The idea to sell is often rooted in personal factors such as deciding to retire at a certain age or around a milestone, such as a child's college graduation. Or it may be based upon the performance of the business, e.g., the company's value, net worth or anticipated revenue. Unfortunately, these reasons can often lead business owners to sell at the wrong time. When a deal isn't timed right, the potential proceeds from the sale are diminished. Without a plan, it is often difficult to assess and act upon the right opportunities.
. Exit Right Having a clear understanding of a company's value is the first step to creating an advantageous exit strategy. It's important to understand the various dimensions of the company's value to evaluate the risks and rewards of acting now versus in the future.
After assessing value and developing an exit strategy, many business owners are surprised to discover they are more prepared to sell than they had originally thought. Whatever the ultimate decision, these concepts are invaluable for strategic planning.
Reason to Plan Ahead
One of the most common misperceptions business owners have is that they can sell their business whenever they are ready. A successful sale takes time, often 18 - 24 months. In order to get maximum value, it is wise to plan ahead by beginning the process sooner rather than later.
About the author:
David M. McClure and Lawrence Schwimmer are Senior Managing Directors at RSM Equico. RSM Equico is a global provider of banking services to private companies. For more information go
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