When Is The Right Time?
Posted in Newsletter Archive
March 26, 2018
Getting the timing right for the sale of a business is complex. What seems like a great time to sell can, with hindsight, turn out to be either premature or too late. We find that most of our clients worry about getting this timing exactly right so having an experienced advisor can help you understand and alleviate many concerns.
While we can’t see the future, we can help you make the best decision possible given the information available. There are a few things we keep in mind when it comes to the timing of a sale.
It’s highly beneficial to have a third-party analyze the current and expected market conditions for both your industry and your particular business and provide an objective overview of how these factors might affect a transaction. Even a terrific company operating in a declining market is going to be challenged to achieve a strong value. Selling before a market peak in order to leave some potential upside for the purchaser is often ideal.
Even if economic conditions are solid in your industry, if lenders and private equity groups are pulling back and buyers can’t get the capital they need, they’re less likely to buy your company. Most buyers prefer to borrow 50 to 75 percent of the purchase price for acquisitions rather than risk all their own cash. It’s often best to consider selling when lenders and investors are feeling euphoric.
Higher rates mean more expensive financing and, therefore, higher costs for the buyer. This, in turn, eats into the value realized by sellers so even with strong market conditions for your industry, higher interest rates can limit a buyer’s capacity to pay up.
Buyers are looking for predictable, steady and ideally growing cash flow. The closer you can get your business to meet these criteria, the better value you are likely to receive. For most businesses there are a host of operational changes or tweaks that can be done in the months and years prior to sale that can help. Diversifying your client base, reducing dependency on key employees, improving receivable collection processes and documenting your processes are just a few examples. From an operational perspective the best time to sell is when everything is humming.
Currently, economic conditions and capital availability are very favourable and while the the boomers are increasingly exiting there’s still a supply/demand imbalance that benefits sellers. These factors are unlikely to line up quite this nicely for too long. Like any investment, trying to perfectly time the market is a mugs game. If underlying conditions are positive and you’re operationally and emotionally ready to transition…then it’s the right time.