When is the Right Time to Sell your Business? A Case Study of a Missed Opportunity

The right time to sell a business. Different colored stopwatches. Image by Gerd Altmann from Pixabay

In every industry there’s an optimal time to sell a business and a less than optimal time to sell.

When Selling a Business, Timing is Key

The economy can play a critical role in determining the value you receive when you sell a business. While timing may help you sell at an optimal price, poor timing may also make your business unsaleable. In most cases, when everything starts to align, it just might be the right time to execute an exit plan. Unexpected events may also occur in your life that may require you to consider an immediate change. These events can sometimes be significant enough that you are compelled to sell regardless of whether the timing is optimal. 

The Right Time to Sell - Case Study of a Missed Opportunity

Several years ago, our firm represented a company that provided services in the energy sector. Profits had been good, and the oil and gas industry was doing well, so the owners decided to explore the market. The company was owned by multiple shareholders, the largest (but not majority) shareholder ran the day-to-day operations, and was ready to retire. 

Within a few months our process sourced several strategic buyers; the company had entertained several offers, and finally entered into a Letter of Intent. The price was almost 20% more than the shareholders had anticipated. The terms of the transaction stated that 90% of the price was paid in cash at closing, and the remaining 10% via promissory note from the acquiring company. Even though the cash portion of the price was more than they thought the company would be worth initially, the shareholders could not agree among themselves about the terms of the note.  In the M&A world, the old adage “time is the enemy of a deal” is very true. While the shareholders were agonizing over and negotiating the terms of the note for almost 90 days, the price of oil dropped 40% and the buyer withdrew from the transaction. The deal had died. Soon afterwards, well-capitalized competitors moved into the space, market dynamics changed and sales dropped. As a result, the company is now worth perhaps 20% of its former value.      

Buyers are particularly focused on revenue growth and profitability. They want to acquire a company on an upward trajectory or one that can demonstrate that it is at least turning the corner. The greater the growth opportunities, the more value they will see in the business. Companies with robust forward-thinking business plans and a demonstrated ability to execute are highly marketable. Unfortunately, many business owners become complacent with their success. It’s not until performance begins to suffer that they consider selling. At that point, buyers will no longer “pay up” for growth; instead they will use the diminishing sales to discount your business’s value.

The Lesson

Many times firms in our industry are engaged to sell a business when a) the owner has died; b) the owner has a serious health issue, c) divorce, d) burnout, or e) other difficulties. Unfortunately, these examples represent the worst time to be putting your business on the market, as the seller is under duress, and in a weak negotiating position.

Selling in a good market, after 20 to 30 years of successful business ownership, will cap a very successful business career, whereas waiting too long to wring that last bit of profit out of the business can change the entire dynamic of a career.

The right time to sell a business. Clock, Pen, notebook and smartphone on white table. Image by Public Co from Pixabay.