Navigating an Important Milestone
Deciding when to sell your small business is a major, highly emotional decision that can often feel ambiguous from the standpoint of picking the right time to take a company to market. And rightfully so. The best time to start a sale process is a subjective concept that can be influenced by a variety of considerations, many of which are unpredictable or outside of your control (read, economic factors).
While the idea of navigating a business sale may be daunting, there are a handful of considerations that can help sellers form a framework to follow on the path to deciding when to sell. In this post, we endeavor to provide a summary of these considerations as well as links to resources that can help you determine when to move forward with a business sale.
Should Economic Cycle Timing Factor Into the Decision?
One of the biggest challenges in determining the right time to sell a business is the uncertainty surrounding economic trends. While many business owners look to market conditions as a guide for timing a sale, the reality is that predicting economic cycles is fraught with difficulty. Even the most seasoned economists struggle to accurately forecast the future, and economic outcomes are often influenced by unforeseen global events, political shifts, or technological changes.
For instance, many economic analysts expected a downturn in 2023 due to various global uncertainties, but the year turned out to be surprisingly resilient in many sectors. This unpredictability underscores the importance of not relying solely on economic forecasts when planning to sell your business. Instead, consider how your business is performing in the present and focus on factors that you can control.
For more information on the challenges associated with predicting economic cycles, including when to be cautious about selling, refer to this article.
Personal Factors and the Impact On Sale Timing
Economic considerations are part of the sale timing equation, but personal factors also play a significant role in deciding when to sell your business. Examples of personal factors include:
Retirement: For transactions up to $50M in sale value, retirement is by far the number one reason that business owners elect to sell. Given that retirement is a foreseeable milestone, sellers will benefit from beginning the sale planning process well before the desired retirement date.
Other Entrepreneurial Interests: We often speak with sellers who have ownership, or some other affiliation, in businesses outside of the core business of focus. As advisor roles, board roles, or mentorship opportunities are presented, sellers often reduce focus on the core business in favor of expanding the network of business affiliation.
Desire to Reduce Risk and Realize Liquidity: As businesses grow, so do the risks associated with managing them and the cash investment required to sustain growth. Some owners choose to sell to reduce these risks and convert their equity into cash.
Management Inflection Point: Sellers often reflect that after many years, or decades, of running a business, they desire to see how a fresh perspective would benefit operations. Rolled equity is a great way to maintain exposure to a business’s future performance, and if the seller has confidence in a new management team the future liquidity from a second bite can be material.
For more information on personal factors and the impact on sale timing, refer to this post that provides data and detail on the topic.
Preparation for the Sale Process is Crucial
Regardless of when you choose to sell, preparation is key. Sellers who have taken steps to prepare for the sale process will be well positioned to take a business to market at an opportune time. Ideally, the sale process will coincide with a period of two to three years of strong company performance, including stable revenue growth, strong customer retention, and a solid operating foundation.
Preparation involves getting your financial records in order, forming an opinion on valuation, and addressing any potential weaknesses that could detract from the appeal to buyers. This might include reducing customer concentration, securing key contracts, or investing in areas that could enhance the business's market position relative to competitors.
In addition to financial and operational factors, ensuring that your management team is capable of maintaining momentum after the sale is important. Buyers are more likely to be interested in a business that can continue to thrive without the current owner’s involvement.
For more information on buyer types and which buyer may be best for your sale process, refer to this post.
How Should Economic Cycles and Industry Health Play Into The Equation?
While predicting economic cycles is nearly impossible, staying informed about your industry and your business's health is essential. The three factors that can be used to measure the quality of the business sale backdrop are the (1) broad economy, (2) the seller’s industry/sector, and (3) the specific company.
Healthy industry conditions can create a favorable environment for selling, as buyers are more likely to purchase a business in a growing sector. Conversely, selling during a downturn in your industry might result in valuation challenges or fewer interested buyers.
We touched briefly on company level considerations earlier in this article, but for more information on the topic, and for detail related to a framework owners can use to assess the health of the three factors (broad economy, seller’s industry/sector, and specific company), refer to this article.
Election Years and The Impact on Business Sales
Election years can introduce uncertainty into the business environment, particularly concerning potential changes to tax rates, regulations, and other economic policies. While it's important to understand how these factors could impact your business, it's also crucial to avoid letting speculation drive your decision to sell.
The political landscape can be volatile, and decisions made based on election outcomes can backfire if predictions don't play out as expected. Instead, take a measured approach to sale timing, guided by the underlying strength of your business and the other factors discussed here. And remember to rely on tax and legal professionals to understand the implications of a business sale, including how changes to tax law could affect your tax liability.
In Summary, Factor Your Unique Goals and Be Prepared
Deciding when to sell your business is an important decision that involves weighing a mix of economic, personal, and business-specific factors. While the unpredictability of economic trends can make timing challenging, focusing on the areas you can control—such as preparing your business for sale, ensuring management depth, and understanding the health of your industry—will better position you for a successful sale.
Ultimately, the best time to sell is when your business is performing well, and when you, as the owner, are ready to transition out. By considering both the personal and business factors outlined here, you can make a well-informed decision that aligns with your goals and maximizes the value of your business.
