By Scott Bushkie, CBI, M&AMI
Perfect storm. Stars aligned. A window of opportunity. There are a lot of clichés out there to describe what happens when everything is going your way.
If you’re hoping to reach that “holy grail” purchase price when you sell your business, here’s what you need to do, and what you need the market to do:
Sell when your company is on a growth trend. Go out on a high note. Psychologically, it can be difficult to walk away from a business when you see clear opportunities for expansion, but those opportunities will be reflected in the purchase price.
Show buyers all the potential ways to expand the business and then let them take on the associated risks. If you want, you can set a deal structure that allows you to keep partial equity after a sale. That way if success does continue, you get a second bite at the apple later on.
Sell when the market is peaking. As a business owner, you can control your sales and cash flow, but you can’t control economic factors like the lending climate, buyer/seller market balances, political factors, or financial bubbles.
The M&A market goes through cycles that are strongly influenced by our country’s economic outlook. In a recent Market Pulse survey from the IBBA and Pepperdine University, we found that 49 percent of businesses valued between $5 million and $50 million sold for a multiple between 4.25 and 6.0 in the fourth quarter of 2015.
The survey doesn’t go back to 2009, but if I had to guess, multiples were probably closer to 3.0 and 4.0 following the financial crisis. We saw another marked decline in early 2002, after the 9/11 attacks.
Catastrophic events are impossible to predict, but you should still keep an eye on other economic trends. The ongoing boomer retirement, for example, could cause market forces to tip to the buyers’ advantage in the future.
Bring multiple buyers to the table. Multiple buyers create an auction-like environment, increase your leverage as a seller, and give you greater opportunity to get the deal structure that suits you best. If your business is on a growth trend and the market is peaking, finding multiple buyers should be an easy task.
Reduce major risks. Identify and neutralize major threats to your business. Customer concentration issues? Focus on diversification. Are you the primary source of knowledge or customer relationships? Build out your management team. Skilled labor shortage? Invest in employee education and build a partnership with your local trade school.
Sell before you burn out. In the Q4 Market Pulse report from the IBBA and Pepperdine University, advisors identified burnout as one of the top four seller mistakes but also the second-most common reason for a business sale.
Burnout endangers the health of the business. If you’re too close to the daily work, you lose perspective and imagination. Growth opportunities get missed because you’re too busy prioritizing the day’s immediate tasks. Worse yet, the buyer will sense that you don’t have the energy to continue and will use that as leverage in negotiations.
Minimize your working capital. Reduce inventory and outstanding accounts receivables to minimum levels and slow the pace of vendor payments to better leverage your vendors’ money. Working capital is included in a business sale, but not cash. The more you can do to transfer money out of working capital and onto your balance sheet as cash, the more you take home in a sale.
Every business owner should have an exit strategy, from day one. Make exit planning part of your annual strategy sessions so that you purposely plan to maximize value for the end goal. Do that and you won’t miss your window.