When Should I Sell My Business?
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When Should I Sell My Business?
Edward L. Fixen, President
BusinessQuest
At one point or another, most business owners ask themselves, “Should I sell my business and if so, when?” Obviously, this is a very personal question that involves many complex issues. The decision of “Should I sell?” is really a personal decision depending on both personal and family issues. Once you have reached the decision to sell or retire in the near future, the decision of “When?” becomes a much more objective process. This article discusses the factors to consider when planning for the most optimal time to sell your business.
Business owners sell for many reasons with burnout, divorce, health and retirement among the more common reasons. Usually business sales caused by divorce or health reasons do not allow for much advance planning, which is probably a good argument for having an exit plan even if you don’t have plans to sell in the near future. On the other hand, advanced planning for retirement and even short-term planning for cases of burnout or life style changes can help you determine the best time to sell your business.
The apparent dilemma and paradox to the question of “When should I sell my business?” is that it is probably when your business is growing and very profitable. This is a dilemma and paradox because that is also when a business owner would most want to keep the business and not sell. However, the financial profitability of a business is by no means the only factor that determines the value of a business. I have seen far too many businesses that based on sales and profitability would appear to be well positioned to sell for a good price. However, further evaluation often revealed issues such as no experienced managers beyond the owner, one or two customers comprising 50% or more of sales, poor financial reporting or old equipment and fixed assets in need of replacement.
Therefore, a key part of the answer to the question “When to sell?” is after you have positioned your company to maximize the value of the business. For example, you might need to hire and train a manager to be able to replace yourself, diversify your customer base so that no single customer accounts for 10% of sales, modernize your facilities and equipment or other initiatives to give your company a competitive advantage. Efforts to re-position your company, particularly with regard to customer diversity, could take one or more years and should be undertaken as soon as possible regardless of whether you plan on selling your business.
The other key part in the sale of many small and medium sized businesses where the owner plays a key role in customer relationships is the owner’s willingness to stay on as a consultant or employee for some extended period after the sale of the business. The continued employment of an owner dramatically increases the value of the business to the buyer by reducing the risk of losing customers, employees and organizational knowledge. It is not uncommon for the buyer to ask for a one year to five year employment agreement to facilitate the post-acquisition transition. Therefore, if you would like to retire and exit the business, you should consider selling several years before you want to stop working full-time.
Given that it can take six months to two years after you begin the sale process to successfully sell a business and you may be asked to remain with the company for one to five years, it would seem reasonable to put your business in the marketplace at least two years and maybe four years before you want to begin enjoying life without the responsibilities of being a business owner.
Author: Mr. Fixen is an MBA, Accredited Business Appraiser (AIBA) and Certified Business Broker (CBB). Mr. Fixen is the President of BusinessQuest, a business valuation and M&A brokerage firm serving small & mid size, privately-held businesses throughout California and can be found at www.BusinessQuestBrokers.com.
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