Why & When to Sell 

 One inevitable decision facing all business owners at some point in their lives centers around “Should I sell and if so, then when?).    With respect to the general question of “Why should I sell?”there are no simple answers.   There are however certain issues that should be considered in making this determination.   The question of “When do I sell?’ is somewhat easier to answer.   I will outline my thoughts on these issues in the following paragraphs.

Why Should I Sell:

Many closely held businesses will have next generation family members active in the business.  Succession potential is a critical component in the decision-making process.  You should determine whether one or more of these family members wish to take on a future ownership role.   You should also be satisfied that those family members do, if fact, have the skills and motivation to successfully operate the business.  There may also be the opportunity for an employee or management buyout, depending on the size and nature of the business.  In the great majority of cases, both of these alternatives require the seller to carry larger amounts of financing than would typically be necessary when selling to an outside party.

Most business owners with no succession strategy will eventually reach a point where they will think about having to sell.  Reasons for selling can include age, health, stress or burnout, and pursuit of other business ventures.  Other reasons may center around growth issues. Is the company growing faster than the present ownership can accommodate?   Does this growth require additional capital and/or operational resources that could best be provided by a new owner?    Is the company flat or declining and is the present owner in the best position to build it up?

It is incumbent on the business owner to consider their options and develop a detailed exit strategy in consultation with his legal and financial advisors well before the desired exit date.   My personal view is that these determinations should begin at least 3 to 5 years prior to the anticipated exit date.

When Should I Sell:

Timing is everything!  That old adage “Buy low & sell high” is good advice for business owners at all stages of their business life.   Unfortunately the principle is often lost in the selling process.   There is a strong tendency for business owners wanting to hang onto an up-trending business for as long as possible.   The desire to sell will kick in as the business begins to flatten or decline.   Buyer, however, will pay premium prices for businesses that are showing up-trends and tend to heavily discount businesses showing decline even in the short-term.  Often, the loss in sale value is much greater than the earnings gained by hanging on that extra year.

If the business is under-performing, then the business owner should determine the possibility for turn-around.   If the present owner does not have the skills, energy or resources to facilitate the turn-around, then the decision to sell should be made as soon as possible.   Even though the current value may be below expectations, the equity value of the business will deteriorate quickly if a new owner is not put in place at the earliest opportunity.

Business owners must look at all the issues as objectively as possible. Above all, any exit strategy must be thoroughly planned and properly executed.

Patrick S. Preston, Agent

Business Brokerage Specialist