I want to sell, but what's the right time? We had a good year last year, but we have new clients starting next month. I'm ready to get out, but two employees just quit. With variables changing constantly how do you determine when the time is right? Mike Williams from Exit Value Advisers helps answer the owner's common question in an article that appeared here:
When Should I Sell My Business?
I often get asked this question and I have two standard responses - the first is:
You should never try to "out-time" the market - always be prepared.
Would you buy your business right now if it was on offer?
There is an unwritten rule in stock exchange investing - don't try to out-time the market.
The reasoning behind this is simple: you will never have complete knowledge of the market. So trying to catch the top or bottom of a market cycle is a myth. Instead you should have set pricing goals and rules on how you invest based on reasoned analysis. When you reach those targets or risk-measures you sell. Sometimes you will gain, other times you will protect against further losses.
The same applies to selling SME's - you will never know exactly the nature of the market and hence trying to pick the right time is never a good idea. Getting a business valuation will give you more information to make better decisions, but we will never know all there is about any market.
However there is one key difference between SMEs and investing in listed stocks - in an SME you, as the owner, have an influence over the performance of the business. So you can use your influence to make the best decisions prior to selling.
Be very clear though - you have an influence over your internal factors - and how you can respond to external changes. You do not have complete control.
BUT - if you have a business that is ready for sale, with good financials, low reliance on owners, clear differentiation to competitors, visibility to effective management and growth plans in place then there are some guidelines you can use.
If you are READY FOR SALE - then the best valuation will come from a mix of ALL of these factors:
Increased earnings over the past 2-3 years (or 18 months with good monthly revenue growth).
Clear financial reports showing increased revenue and effective cost control.
Management and business processes well established that reduce key person risk.
Clear path to scale.Multiple buyers interested in your business (that have had contact with you in the past).
An absence of high risk within your industry (or at least some risk stability) such that there is confidence in the future.
You will notice that you, as the SME business owner, have significant influence and control over the first four bullet points. You can prepare for this now.
It is the last bullet point that you have less or no control over. But again - you can plan for how your business will react or adapt to industry risks and changes. There are many taxi drivers that failed to plan for the adoption of Uber and the changes to regulation in many Australian states. But there are also many cafe and restaurant owners that are looking to attract market share by using the Uber technology to reach more customers.
The point is that with preparation and planning you can make your business more attractive despite the challenges and risks to which your industry are exposed.
Now there are some guidelines as an SME business owner that you need to consider:
Selling a construction business in an environment of increasing interest rates and falling real estate prices (which may be subject to local factors rather than national trends) is unlikely to attract a premium.
Selling your importing business at a time when Aussie dollar exchange rates are in free fall is not a good idea.
Selling a retail business at a time when the economy is in recession is unlikely to ever lead to a good valuation.
But the price you can achieve for your business in each one of these circumstances is improved if some of the key factors are in place - such as the ones we have listed above.
So are you ready for sale? Is your business prepared to get the best valuation it can achieve or are there things you haven't yet planned for or not addressed?
This process is not a valuation - but gives you some clear and detailed ideas on what you must do to get your business ready for sale and how this will lead to an increased business valuation.
So - would you buy your business if it was on offer right now? What would you pay?
Mike is a small business valuation expert with ten years’ experience in valuing privately held businesses and more than 15 years management consulting experience.
This article originally appeared at: https://www.exitvalue.com.au/blog/when-should-you-sell-your-business.