In the last article we discussed Step 3 – Available Alternatives
Step 4 – When is the Right Time?
We can talk about a lot of issues that determine your timing. Emotional readiness, the financial condition of the company, your management team, valuation, growth strategy, profit history and prospects for this year and next. But the first business I ever helped a client sell crystallized the single most important thing about timing. One thing, and all the other factors make very little difference.
My client had owned and run a premier musical instrument business for 30 years. He was now over age 65 and was ready to sell it. He had a strategic buyer that wanted to expand into his city and region, and the buyer wanted the premier name as well as his desirable lines, some of them long-time exclusives. His business had no debt other than Winning the Exit Game - Step 4: Timing Your Exit Strategy
inventory financing on a high quality, currently-marketable inventory. Goodwill was excellent. The buyer was getting a winning name in the marketplace.
Oddly, the price offered did not represent a big premium for the value of goodwill expected earnings, or the expected growth the buyer would enjoy moving into this market with a great name and market position. But, my client was willing to take the all-cash deal and long-term leases on his retained real estate locations. “Why?”, I asked. “Wayne”, he told me, “I had a chance to sell this business three years ago for three times this price, but I wasn’t ready. Thought I wanted to stay in it longer, and I thought I could get more. I turned them down, and the market changed, and their fortunes changed. About a year later, I realized I was ready, but they weren’t buying by then. Iv’e looked for buyers since, had a couple of other potential deals that wanted me to finance everything long-term. Finally this cash deal came up and I think it’s the best I can do. I’ve been ready now for two years, and I’m not letting this one get away. I sure wish I’d sold three years ago, I’ve missed a lot of golf and money.
So, the time is right when the market, the buyers, the money is right. If those things are right, it’s time to get your emotional readiness in line, or you are likely to miss the boat. It’s that simple. If you turn down a great market, when buyers are trying to pay you a great price, by the time you get ready, the market cycle will likely turn. And, you will have to sell at a much lower price, or wait for the next cycle. For many niches the next cycle does not come.
The time is right when the money is good, and terms are favorable – The Market is never wrong.
Another thing is growth. It’s easy to see that you should hold on to a growing business, sell it after it grows bigger. That makes sense, and may be right. But you can’t get the best price at the top of your growth curve. Buyers pay the best prices when they can’t see the top, when it looks like all up from here. When others can see the top, they don’t buy, or pay prices based on the downside risk after the top.
To get the best deal you have to sell on the way up, not “at the top”, and when the market and prices are good. When you wait until you are ready to go, you are in a weaker bargaining position, and buyers can smell that.
Today’s market, with private equity wanting to buy into companies on the way up, wanting sellers to stay in the game after cashing out, is one of the best for strong exit strategies. This is also favoring strategic buyouts and management succession buyouts. A major demographic also fuels this. The leading edge of baby-boomer-business-owners are reaching the exit zone, and the 30-something-up-and-comers are aggressively buying and building. Buyers exceed sellers, and we have a robust exit market –for now. The time is coming when the flood of baby-boomer-business-owners ready to exit will outweigh the ready next-generation buyers, and prices and acquisition appetites will fall – bigtime. As a seller, you do not want to be in the middle or later in that trend. Now-ish is the time for an exit strategy. Don’t buck the Boomer trend. And, remember, The Market is never wrong.
Isaacks & Associates, Ltd., L.L.P.
12777 Jones Rd., Ste. 100
Houston, Texas 77070
Office: 281/807-6172 Fax: 281/807-6173
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