For every business owner, there will come a time when they need to exit the stage. Some will turn their business over to the next generation, while others might want to sell to employees or an outside party. Most people exit businesses for lifestyle rather than financial reasons. Some common reasons may include retirement, health concerns, a move out of the area, or a desire to get into a new business or career.
Whatever the reason for wanting to sell, timing is very important. In some cases, an owner may not have a choice on timing. For example, if their health is rapidly deteriorating or they have a certain date in which a move out of the area must be completed, then the sale needs to happen as soon as possible. This is unfortunate, because the need to make a quick sale makes you a “motivated seller”, and in this scenario, you will probably have to take less than what your business is really worth.
For those who are flexible on the timing of a sale, this is a much better position to be in. Business sales take time, typically 6 to 9 months in many cases. An owner needs time to prepare, get all of their ducks in a row, and do whatever they can to maximize the value of the business. So, if you have a choice in timing, the next logical question is, “when is the best time to sell my business?”
Of course, there are as many answers to this question as there are business owners who want to sell. Every situation is unique, and the right time to sell will always depend on your specific circumstances. That said, there are some general factors that apply across the board when determining whether or not to sell a business:
- Earnings: One of the primary factors that determines what a business is worth is net earnings. Buyers will be very interested in this figure, as this will be the rough amount that they can expect to be able to live on as the new owner. The value of a business is largely determined by a multiple of net earnings. The value of the assets of the business will also play a role, and it could be a much bigger factor in certain industries, such as commercial real estate.
- Trends: Positive cash flow is nice, but equally important to a buyer is whether or not they can expect to maintain (or hopefully increase) net earnings after they take over. No one can predict the future with certainty, but there are some indicators that can give us a good idea about future performance. So, a buyer will look carefully at whether your sales are trending up or down; and if they are going down, what is causing this and what will it take to reverse course?
- Market Strength: Another factor that will almost certainly affect how much your business can sell for is what comparable businesses in your area are currently selling for. Hopefully, there is more demand than supply (in your local area) for the type of business you are in.
- Overall Economy: The overall strength of the economy will always be a factor in deciding the best time to sell a business. Economic conditions do not affect each industry equally, but if the economy is strong and growing, this tends to inspire more confidence among entrepreneurs across all economic sectors.
Is Now a Good Time to Sell a Business?
All other things being equal, the best time to sell a business is when all four of the above-mentioned factors are working in your favor. The first two (earnings and trends) are within your own control. If they are not where they need to be, then you need to take steps to rectify that situation. This may include upgrading your technologies, streamlining operations to make them more efficient, employing more effective marketing strategies, and many others. This is one of the most important reasons why you need ample time (several months in many cases) to prepare for a business sale.
The last two (strength of comparable business sales and the overall economy) are external factors that tend to work hand-in-hand. When the economy is strong, more people want to capitalize by becoming business owners. As we get ready to wrap up 2019, this is exactly the position the economy is in. The economy grew by a healthy 3.1% in 2018, and similar overall numbers are expected for 2019. Confidence is strong right now in most sectors, and if you are thinking about selling your business in the near future, you will most likely have the economic winds at your back.
For a more detailed analysis of whether or not it is a good time to sell your business, it is best to speak with a reputable business broker. Business brokers, also known as business intermediaries, work closely with owners to help them obtain the best price, terms and conditions during a sale. These are professionals who have their fingers on the pulse of what is happening in the marketplace, and they can provide skilled guidance on what will be needed to sell your business for top dollar.
