“When should I sell my business?” It’s a question I’ve heard many times during my 13+ years as a business broker, and the answer can be elusive.
Some business owners view their business as an investment and strive to sell their most valuable asset at or close to the peak of its value. Many more owners, however, are just waiting for “when it feels right” to pull the trigger on selling.
The problem with “when it feels right” is that it may or may not coincide with your business being positioned to attract buyers and sell for a good price. Even worse, “when it feels right” may come at a time when it will be difficult or even impossible to sell your business.
While finding the “best” time to sell your business takes some thought and advanced planning, identifying scenarios to avoid is a bit easier. Following are seven of the worst times to sell your business:
#1 When the numbers look bad
The first thing a buyer wants to see is the financial statements of your business (typically for the last three years). Your numbers can look undesirable to buyers for a variety of reasons. A few examples include:
- Sales have been inconsistent or declining year-over-year
- Gross margins are getting smaller year-over-year
- Net margins are thin, or getting thinner year-over-year
- Receivables take too long to collect
- Major capital improvements have been put off and are imminent
- Too many non-business expenses are run through the business
- The book are disorganized, incomplete or unclear
The financial statements of your business are its foundation. Period. I once heard a seasoned M&A guy say “if your numbers are bad, your story better be good.” The truth is there are few excuses for poor financial results that will appease buyers. If the financials look shaky, buyers will take a pass on your business and keep looking for a better investment.
#2 When your industry is in decline
You’ve seen the writing on the wall. But it can be tough to admit that your industry is dying. You may even consider staying in the game based on principle alone. Yet the reality of things often dictates that it’s time to let go.
Many owners think that someone else may want to tackle the challenges of their industry — maybe someone younger, with more energy, more capital, or fresh ideas. But the truth is that most buyers want to buy a business in an industry that at a minimum has staying power, or better yet, is on the upswing.
Selling your party supply business right after the biggest player in the industry has announced it is closing 55 of its stores will likely be an uphill battle.
#3 When you can’t hang on at least one more year
Owners often sell when they’ve reached a point of burnout. There’s nothing wrong or even unusual about getting tired of owning and running your business. Even if you’ve got it running like a Swiss watch, you may simply be ready to close one chapter of your life and move on to another.
The problem comes when you’re so burnt out that you can hardly keep yourself from shuttering your business and walking away. The selling process itself can take up to a year (or longer in some cases), so at a minimum you’ll need to keep running the business — and running it hard — while you’re trying to sell.
Sometimes putting a year’s worth of work into the business prior to selling can help attract buyers and support a strong valuation. Even simple improvements like tidying up the books, documenting processes and freshening up your website can make a difference. If you take a year to prepare, plus a year to sell, that’s two more years you would need to stay focused on your business.
I can’t tell you how many times I’ve heard owners say “we should have started this process two years ago.” And that’s the magic number: Try to start the process of selling your business about two years before you want the deal to be done, not when you’re ready to call it quits.
#4 When you’ve lost key people
This is often one of the primary causes of burnout. Few things hurt the business, and the owner, like the gut-punch of one of your top managers leaving. Or worse, three of your top managers leaving to start their own business. Ugh!
This is another one of those throw-in-the-towel moments. Why not just sell the business so you never have to deal with this situation again?
Unfortunately, one of the things a buyer will be looking for in your business is a strong layer of upper management. If there’s no management team between you, the owner, and frontline employees it can be hard (even impossible) to sell your business. At a minimum, you’ll be asked to stay long enough to find and train a replacement and fill the open position in the meantime.
#5 When the business is too small to support a sale
When you started your business you may have anticipated growing it to a certain size. Maybe the goal was $3M in annual sales, or five locations, or doing business nationwide.
The reality is that scaling a business can be hard. There’s often an inflection point or hurdle that’s difficult to get past without taking on additional risk. In order to grow you may have to raise more money by taking on debt or diluting your equity, hire more employees, buy more equipment. Oftentimes the headache and risk associated with scaling your business doesn’t seem worth it. Why not just keep things at a manageable level rather than invite a whole new host of problems by getting bigger?
Regardless of why your business has stayed the size that it is, there’s a chance it may be too small to sell. This may sound strange. Why can’t you just sell your small business for a small price and get out from under it? The answer is twofold: too much risk, and not enough cash flow.
The smaller the business the riskier it appears to outsiders like buyers and lenders. The assumption is that the smaller the business, the more it revolves around the owner, making the business worthless once he/she is gone.
Assuming your buyer is another owner/operator, your business will also need to generate enough cash flow to do the following: Pay the new owner a good salary and benefits, with cash left over to reinvest in the business and service debt. Many smaller businesses simply don’t generate enough cash to make the math work for a buyer.
#6 When banks aren’t lending
There are things you can control when it comes to timing the sale of your business, and some you can’t. This article focuses primarily on the former. With that said, it’s worth noting that it is difficult to sell a business when the economic environment is bad in general. It can be next to impossible to sell your business when access to capital is constrained for some reason, like during the 2008 financial crisis.
One of my biggest achievements as a business broker has been (miraculously) surviving the Great Recession. During that time banks simply weren’t lending. To anyone. For any reason. Least of all small businesses. The business-for-sale marketplace was basically a desert. I remember commiserating with a peer who described it this way: It’s not that deal flow slowed down. It died.
You want to sell your business when the money is flowing, in more ways than one.
#7 During a personal crisis
While this scenario is sometimes unavoidable, it’s usually not the ideal time to try and sell your business. A few things end up happening when you’re trying to sell your business in the middle of a personal crisis (i.e. illness, divorce, partnership or family dispute, personal financial trouble, etc.).
- It’s hard to focus on what is a complex process that demands a lot of mental and emotional energy.
- It’s hard to remain dispassionate and make emotion-free (rational!) decisions.
- You may ignore the voices of reason, like advisors, friends and family.
- Your personal situation may have already hurt the business, either operationally or financially.
- You may have to accept a lower valuation just to get out.
- You’re in a weak negotiating position.
- You’re often up against a time crunch. This can affect the value, as well as your ability to find a buyer. It can also lead to rushing the process, which may result in making mistakes or critical oversights.
If you sense a personal crisis looming on the horizon, start the sale process ASAP. We’ve helped owners sell prior to divorce and immediately after a serious medical diagnosis. Just know that the longer you wait, the harder it will be.
An ounce of prevention is worth a pound of cure, as the saying goes. The best inoculation against the scenarios listed above is to build a sellable business. A sale-ready business gives you options, like selling during the best of times and avoiding the worst.
Give us a shout if you’d like to get started on making sure your business is sale-ready.
Author: Barbara Taylor
Barbara is co-founder of Allan Taylor & Co. and a former New York Times blogger. She has been a small-business owner since 2003. Barbara lives with her husband, Chris, and their two sons in Northwest Arkansas.