Time to Sell Your Business?

Sell my business?  Many business owners like you are asking: “When is the right time to sell my business?”  To Empire Business Solutions, a M&A Business Broker in Orange County, California, the answer often relies on three factors, which I will explain below.  However the correct question should be: “When is a good time to take some money off the table?”  These days, with all the private equity (PEG) activity and options, business owners should look at not just the ultimate exit, but whether a partial exit makes sense.

Today it is possible to sell a portion of the company to take advantage of favorable market conditions and diversify your net worth, yet continue to run your company.  So let’s consider whether now is a good time to seek liquidity—either partial or full liquidity.

The three considerations for evaluating the timing of an exit are:

  1. Is the overall market for selling companies favorable?
  2. Is the company’s recent performance strong enough to attract a favorable price?
  3. Am I emotionally prepared and motivated to either exit my company or willing to bring a partner on board to help me take the business to the next level?

It is not likely that you will experience the perfect storm where all three of these considerations are good simultaneously.  Rarely do all the stars line up.  Those who wait for that perfect moment typically wait too long to exit; they are forced to continue in the business longer than they desire or to accept a sub-optimal price.

But the answer to all three questions needs to be acceptable, or the timing might not be right.

In 2012, the answer to the first question is that the market for selling most private companies is getting more favorable.  The prices being paid today are not quite as aggressive as they were at the peak in 2007 and early 2008.  But they are close, and as good as we can expect to see in this new era of limited leverage for the foreseeable future.

Today U.S. corporations have more cash on hand than any time in history.  They are anxious to put it to work, and acquisitions are the most expedient way for many of them to do so.  Additionally, private equity firms have an unprecedented level of cash (often called “Dry Powder”) to acquire businesses.   There are over 5000 firms that have to invest in private businesses to justify their existence.  A private equity firm cannot survive unless it invests all of its capital because its investors will ask for their money back—with a return—in either 8 or 10 years from the commencement of the fund.  Today there is a significant pent up demand among both the strategic (corporate) buyers and financial (private equity) buyers.

Moreover, when selling a business, the concern should not be: How much do I get?  Rather, it should be: How much do I keep?  And that is a function of the tax code.  Late last year Congress extended the Bush tax cuts.  That means capital gains rates will remain at 15% until the end of 2012 and hopefully longer.  Our current budget deficit is unsustainable, and tax rates will go up after 2012 and probably never be this low again in our lifetime.

So that leads us to the next question: How is your company performing?  A surprising number of my clients did well in 2012.  If you are in that boat, 2013 should be a superb time from a market standpoint.  The field will get very crowded next year.  But some businesses did not fare as last year.  If you are in that boat, look at 2013 as a time to maximize your bottom line so you can cash out in the coming years.

The final question is whether you are mentally, emotionally and financially ready to exit.  Let’s just summarize some key considerations.
First of all, give up the notion that you can sell your business and invest all the proceeds in Treasury securities with no risk and maintain the same income.   A low risk diversified portfolio of liquid securities will never yield the same return as a private company.  You may think your company is low risk because you are in control.  But from a pure finance perspective, it is not.

If you are not financially or emotionally ready to fully cash out today, you should consider selling part of your business to a private equity firm now, continuing to own a meaningful percentage and operating the business.  Then you can set aside enough cash to take care of most or all of your family’s financial needs and sleep a little better the next time we have a financial or political crisis.  It is not a question of if, but when.  And you can have access to the expertise of professional investors who are trained in how to build business value.  Out of over 5000 funds, surely there is one or two which you could get along with.  Perhaps not.  But to take your company to the next level, having some outside counsel usually helps.  Then in 3, 4 or 5 years you can exit fully—have your second bite at the apple—and provide a nice return to your investors and yourself (and not have all your eggs in one basket in the meantime.)

If you are the type that does not think you could function with a partner in the mix, and you know you want to retire in the next few years, you should target the end of 2013 as the time to be safely out of the business and hope the tax rates have not increased.  And since it generally takes up to 12 months to complete a sale transaction, you need to get busy looking for the right team.  To get the best deal, you need to have an advisor who will pro-actively approach every logical buyer out there and make sure you have several parties to negotiate with.  A competitive process is the only way to assure a successful outcome.

Selling Your Business? Expect the Unexpected!

According to the experts, a business owner should lay the groundwork for selling at about the same time as he or she first opens the door for business. Great advice, but it rarely happens. Most sales of businesses are event-driven; i.e., an event or circumstance such as partnership problems, divorce, health, or just plain burn-out pushes the business owner into selling. The business owner now becomes a seller without considering the unexpected issues that almost always occur. Here are some questions that need answering before selling:

How much is your time worth?

Business owners have a business to run, and they are generally the mainstay of the operation. If they are too busy trying to meet with prospective buyers, answering their questions and getting necessary data to them, the business may play second fiddle. Buyers can be very demanding and ignoring them may not only kill a possible sale, but will also reduce the purchase price. Using the services of a business broker is a great time saver. In addition to all of the other duties they will handle, they will make sure that the owners meet only with qualified prospects and at a time convenient for the owner.

How involved do you need to be?

Some business owners feel that they need to know every detail of a buyer’s visit to the business. They want to be involved in this, and in every other detail of the process. This takes away from running the business. Owners must realize that prospective buyers assume that the business will continue to run successfully during the sales process and through the closing. Micromanaging the sales process takes time from the business. This is another reason to use the services of a business broker. They can handle the details of the selling process, and they will keep sellers informed every step of the way – leaving the owner with the time necessary to run the business. However, they are well aware that it is the seller’s business and that the seller makes the decisions.

Are there any other decision makers?

Sellers sometimes forget that they have a silent partner, or that they put their spouse’s name on the liquor license, or that they sold some stock to their brother-in-law in exchange for some operating capital. These part-owners might very well come out of the woodwork and create issues that can thwart a sale. A silent partner ceases to be silent and expects a much bigger slice of the pie than the seller is willing to give. The answer is for the seller to gather approvals of all the parties in writing prior to going to market.

How important is confidentiality?

This is always an important issue. Leaks can occur. The more active the selling process (which benefits the seller and greatly increases the chance of a higher price), the more likely the word will get out. Sellers should have a back-up plan in case confidentiality is breached. Business brokers are experienced in maintaining confidentiality and can be a big help in this area.