As I meet with entrepreneurs, I’m often asked the same question: “When is the best time for me to sell my business?” The answer to this question is not the same for every business owner, for many reasons.
For instance, an entrepreneur may want to sell for personal reasons, and not for reasons related to the business or its financial condition.
Unfortunately, when personal reasons drive the need to sell a business, the outcome is typically not ideal. More positive results are obtained when entrepreneurs are willing to chart a course as they consider selling and realize it’s a process, not an event.
Best Way to Sell a Business
If an entrepreneur wants to optimize the sales price of his or her business, it is best practice to establish a three-to-ten year time frame to sell the business. This may sound crazy to some, but hear me out.
There are three factors which have the most impact on the value of a business when it is sold to a third party. Two of the factors are not in the business owner’s control while one is. It’s been my experience that entrepreneurs typically don’t like things they can’t control. Sorry if this seems like a blunt statement. Nonetheless, it’s true.
So if you’re an entrepreneur and want to sell your business, what should you do?
Understand the Three Most Impactful Valuation Factors When Selling a Business
1. The business’s EBITDA or the cash a business produces over a three year period. This single factor is controllable by adopting proper planning to create a profitable business model that’s executed by good management.
2. The Industry in which the business operates. Is the industry growing, exploding, shrinking, or disappearing? If it’s one of the latter two, the business owner has a much shorter time frame during which to sell before the business’s value may be gone. Alternatively, if the industry is either growing or exploding, the timing of the sale is critical due to changing valuation multiples. These values may change rapidly so it pays to know the current industry multiple and the direction in which it’s moving.
3. The M&A climate, or in other words, the relative cost of capital for private enterprises. Mergers and Acquisitions activity goes up and down. If an investor is unable to find sufficient returns on his or her money by investing in stocks, bonds and real estate, then investing in a private enterprise becomes more attractive. That’s when the M&A climate is most favorable. Conversely, when the stock, bond and real estate markets are healthy and producing nice returns for investors, buying private enterprises falls out of favor.
The entrepreneur is truly only able to control the EBITDA their business produces, so I recommend focusing on improving EBITDA first. By doing so over a three (or more) year time frame while keeping an eye on the industry itself as well as the M&A climate, an entrepreneur will be well positioned to take advantage of good timing when it arrives.