When is the right time to sell a business?

Article

When is the right time to sell a business?

Dave Rebbettes
October 2018

For most business owners, knowing the right time to sell a business is a gradual process, involving a complex mix of commercial and personal reasons unique to the shareholders. In an age when family succession is a rare event, when new technologies are making whole industries obsolete, and where most of us can look forward to 25 years in active retirement, business owners are putting more thought into their eventual business exit than ever before.

The average company lifespan has shrunk rapidly since the 1980s, and today’s businesses can typically expect to be around for 15-20 years. For those ventures that do make it beyond start-up phase, it takes around seven years for most companies to make their first million.

While sector growth rates vary wildly, a study of 50 BCMS clients who sold in 2018 found that the average age of the business is 18 years before getting acquired.

Here we look beneath the trends to find the triggers that indicate it could be the right time to sell for you and your business.

On the up - growth stage

Growth stage is a critical component in the acquisition marketplace. Selling a start-up is unlikely to get the founders a decent return on all that risk and effort, while for buyers they are often viewed as unproven or inconsequential. So as a general rule, start-ups are harder to sell and harder to acquire than later stage businesses. Saying that, internet giants Google and Facebook are well known for buying start-ups in areas of interest, so there are exceptions in some cases.

Similarly, there will be fewer buyers in declining industries for obvious reasons. But again, those who survive a recession and pick up all the available work when the good times return can be successfully sold, but perhaps at a slightly lower valuation to take account of limited growth potential.

The sweet spot is in between. Growing and mature businesses – typically 10-20 years old – have the stability, specialism and track record to reassure acquirers. And in turn these firms can command acceptable valuations to convince vendor shareholders to go ahead with a deal.

Beating the market - company performance

How you compare to industry peers is a strong indicator of both saleability and achieving an acceptable sale price. It’s a combination of hard and soft factors that builds the appetite, including:

  • Market share - strong positions in niche segments are valuable, and a demonstrable track record serving several markets to hedge against customer concentration is also attractive
  • Workforce skills – finding and keeping good people is hard in today’s tight labour market, and a good time to sell is before all your star performers move on to pastures new
  • Management team – nearly all acquirers want to know who’s capable of running the business when the owners have gone, so a strong second-tier is a sign your business is ready to sell
  • Customer retention – if your customer list is the envy of your industry, that’s worth something. Even better if they are under a contract that’s recently been renewed.
  • Financials – sustained double-digit profit margins and ongoing sales growth are an obvious indicator of a healthy business.
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Deal activity - industry acquisitions

Increasing acquisition activity is a clear pointer to pause and seek professional advice so you don’t miss the boat. M&A cycles come and go, and those high valuations you keep hearing about may not be available five years down the line.

Disruptive new entrants may threaten the status quo in your sector, and investors with deep pockets may be backing half your competitors. That doesn’t mean your business will slip into terminal decline, but it suggests it’s time to re-examine your main differentiators. If you aren’t willing to invest in that journey, or you are unsure which way to turn next, this suggests the time is right for you to take advantage of the market, sell up and move on.

For example, Amazon has expanded beyond its core e-commerce offering to enter cloud computing, grocery retail, transport logistics, and online pharmacy prescriptions in recent years.

Also, don’t forget that buyers have similar dilemmas when acquiring. Some have strict acquisition target criteria, while some are opportunists who make occasional forays. And some are forced to acquire to by competitor movements.

The big picture - economic cycle

Benign economic conditions make it easier to do business – including acquisitions. For instance, the ongoing low interest rates have made it easier for corporations to borrow more for acquisitions. Lower inflation and high business confidence (e.g. stock market performance) are also useful for increasing appetite for acquisitions.

Conversely, rising labour costs or exchange rate fluctuations may start diluting the profit margins your eventual exit will be valued on.

Right for you - personal circumstances

Your own reasons for wanting to sell tend to also help you build a timescale for your eventual exit. These can be sudden and unexpected – like a divorce or health diagnosis – or more fluid, such as a desire to relocate, other business interests or retirement.

More than 80% of BCMS clients are aged 40-70 when they sell, with an average age of 57. But not all of those are looking to retire, and a host of seemingly insignificant factors can have a bearing on deciding it is time to sell and exit.

Common personal reasons for selling a business include:

  • Retirement
  • Improve work/life balance
  • Personal financial exposure to your business
  • Family demands
  • Health issues or burnout
  • Serial entrepreneurs wanting to sell up and start anew
  • Wealth portfolio review

Key takeaways

  1. Stay flexible with your timescales. There are lots of twists and turns in negotiating a business sale
  2. It can take up to two years to prepare your business for sale, so build that into your plans
  3. Learn more about acquisitions in your industry, including buyer rationale, and price and terms where available. A professional business sale advisor can help bring you up to speed.