When is the right time to sell a business?
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
By: Dave Rebettes