When to Sell Your Business?
Many would agree that the hardest part of going into business is starting it. The thought process – and the whole process of deciding what business to start and how to get it started is, for most, half the battle. Once they have gone through that stage, things become slightly easier because now they have an idea of where they should take the business and how to go about it. They already have a plan, and all that is left is to follow through with it: implement the plans, monitor the progress, and evaluate the results in order to decide the next steps that should be taken to make the business grow and last.
But there is one other decision about businesses that is just as challenging and difficult to make: deciding when to sell the business.
Think about it. You have been there from the onset: coming up with the business idea, formulating the business plan, setting it up, hiring people, running the operations, watching it grow… Selling it would seem unthinkable, isn’t it? But it is something that does happen, for various reasons.
In this article, we explore 1) the reasons for selling a company or business, and the timing 2) when do you sell your business?
REASONS FOR SELLING A COMPANY OR BUSINESS
Deciding to sell a business could not be an easy decision, and once it has been reached, it is sure that there is a good reason behind it. But what are the most common reasons for selling a company or a business?
According to Evan Williams, formerly the Chairman and CEO of internet giant Twitter, any of the following three would be reason enough to sell a company.
1. The Offer captures the Upside
In short, the benefits of selling far outweigh the cost of keeping it going. This requires comparing the offer (how much your prospective buyer is willing to pay) and the returns that you are currently receiving and will likely receive in the future, should you continue running the business. You are aware of the projected valuation of the company; how does that compare with the offer? If it is well below the latter, then it is likely that you will look more favorably towards selling.
Williams emphasizes, however, that this reason holds a lot of merits purely from a financial perspective when all you will take into consideration are the numbers.
2. Imminent Threat
Williams pointed out a universal truth about businesses: just as it has potential, risk is also a constant factor that it has to deal with. The only difference would be in the degree of risk involved.
The threat could arise from various sources, mainly internal and external. In both cases, an objective evaluation or risk assessment must be conducted. Do the risks far outweigh the potential, or the benefits the business expects to reap? If the threat is real, and it looks like the business will not be able to rise above it, you might want to consider selling.
3. Personal Choice
This is where the business owner’s personal emotions and feelings will come into play. Are they still interested in continuing running the business? Do they have the same passion or enthusiasm as they did when they were still in the process of getting it started? Exhaustion is not a new thing among business owners, and this is one reason that will compel them to give it up. They find themselves on the edge of a burnout, or they are simply tired of the daily grind that the business exposes them to. Perhaps they have other plans, and those plans do not involve running the business, even if it is still profitable and is poised to achieve bigger and better things in the future.
It is also possible that they are facing certain circumstances or life-changing events that would eventually make them decide that they can no longer continue with the business. Personal upheavals factor greatly in many business decisions. It is no longer rare to find business owners that go, “We’re done, so let’s just sell.”
Williams encapsulated the three main reasons in the items listed above. However, if we are to break them down, we will find that there are other reasons that will inevitable convince business owners to sell.
The other common signs that most business owners go by when making a decision whether to sell or not include the following:
- When the company is growing or expanding so fast that the owner can no longer finance its growth, even when it seeks equity or debt financing. The most obvious choice is to sell it to someone who can do so.
- When the business owner is presented with better business opportunities. This may come from more lucrative ventures or income opportunities. He or she may even be looking for a new challenge and running the business no longer excites him or her.
- When the company can still be fully operational even without the presence of the business owner. This type of business tends to be more attractive to potential buyers.
WHEN DO YOU SELL YOUR BUSINESS?
When a business is not doing well and suddenly finds itself in dire straits, one of the first things that will likely come to the mind of the owners is to sell it off. Is the business going nowhere? Sell it. Is there a new player in the game and the competition is simply too strong for the business to go against? Sell it. Is the business not making any money? Sell it.
But it is not that simple.
Some experts say that the best time to sell a business, especially a startup company, is when there is really no immediate need to do so, or the owners do not have a strong desire to sell it. According to them, selling the business when it is barely scraping by or when it cannot go up against the competition is not the best idea. For one thing, there will not be a lot of bidders who will put in an offer for a failing company. In the event that there are some who will put in an offer, it is more than likely that they will have demands that the business will relent on in order for the sale to push through. And guess who will have the most advantage? Not the business, that’s for certain.
The answer as to when the business will be sold is not something that business owners can easily come up with. There are a lot of factors to take into account and possibilities to consider.
To Sell or Not To Sell: A Rule of Thumb
There is a basic rule that most business owners go by when performing to-sell or not-to-sell decisions. DO NOT SELL if (a) the business is in a large market, and it is “early”, or the first of its kind in said market, and (b) if the business has a fairly good chance of being the top performer in that market. SELL the business if you do not meet either of the two conditions.
A very good example would be Google. When it was starting out, the market was already large. However, early on, it was already clear that Google is offering a product that will easily catapult it to the top of the chain. It was already receiving acquisition offers left and right, amounting to billions of dollars. But Google had bigger plans, and the offerers own markets that are considerably smaller than the one that Google is eyeing.
Google passed on these offers, and it was a wise decision on their part. Needless to say, today, they have pretty much overpowered these potential buyers.
The Opportunity Cost of Selling and Not Selling
Ask yourself this: if you sell the business, what are you losing? What are the opportunities that you are letting go of? On the other hand, what benefits are you foregoing if you do not sell?
If you do not sell the business and decide to stick to running it, you may be letting go of the following:
- Another business or income opportunity
- Time with family
- Time for yourself
- New and fresh challenges
Seeing as you will devote more time to continuing running your business, you can simply pass up on the opportunity to spend more time with your family and friends. If you have plans to travel, you might as well kiss them goodbye since you still have a company to run.
Selling the business, on the other hand, will prevent you from taking advantage of the following:
- Expansion or growth of the company
- Involvement in the lives of employees or personnel of the company
- Personal and professional development as a business owner
- The regular income stream that the business may bring over the years
Naturally, since they are selling the business and relinquishing control of it, they are missing out on opportunities or chances of making it grow.
The points mentioned above are not applicable to everyone. When assessing the opportunity costs, they will largely depend on what the business owner’s goals are. Making a comparison of the opportunity costs of selling and not selling will also go a long way in aiding business owners in the decision-making process.
The Emotional Factor
As mentioned earlier, things would be so much simpler if there are no emotions involved and business owners can simply base their decision on whether to sell or not to sell on facts and figures alone. Unfortunately, that is not always the case.
Owners will always form a degree of attachment to the businesses they start or set up. There is no getting around that fact. Many even consider their startup companies as their babies, so letting them go and handing over the reins to others would be quite a blow.
Feeling emotional at the thought of selling something you worked so hard to get off the ground is a natural response. It is also inevitable. The key here is to be prepared for it so it would not cloud your judgment too much when it’s time to make a decision.
Haste Makes Waste
This adage applies to most things in life, and it couldn’t be any truer when it comes to business owners looking to sell their business. This is especially true in the case of small businesses. Selling the business is not something they should do on a whim, or carelessly. There should be careful planning on the part of the business owner if he or she wants to get the best price possible.
This would not be too much of a problem if, from the beginning when the business was still being proposed, an exit strategy has already been formulated. Basically, when starting the business, the owners should have already thought about when it plans to sell the business, and how. If that is not the case, however, then it would be wrong for the business to be hasty in deciding to sell.
The best time to sell…
This is a consensus among business experts and advisors: sell when the business is doing well because that is when the business will get good offers.
Therefore, it can be said that the best time to sell the business is when, after much deliberation, study, risk assessment and cost-benefit analysis, it has become clear that doing so will put you – the business owner – in a more advantageous position.
When is this? Just keep in mind that a business will get the best offers at a time when
- the economy, as a whole, is doing very good; and
- the business is performing up to – or more than – expectations.
The state of the economy will also be instrumental in the ease with which the potential buyers can obtain financing to pay for your business.
Fortunately for business owners everywhere, there are professionals that they can turn to for advice when considering whether they should sell their business or not. When in doubt, seek help.
“It doesn’t make sense to hire smart people and then tell them what to do; we hire smart people so …