Timing the Sale for Maximum Price

Picking the right time to sell a business can mean the difference between a substantial retirement income and nothing.

Every business will go through four stages of a life cycle. Please see the graph below.

 

The smart time to sell is when the business has completed its growth stage and is beginning to mature. At this point the business will realise its maximum value.

Too many owners try to sell at the decline stage because they haven’t recognized that their business is in decline. Sometimes the decline is due to increased competition in a mature and no longer growth industry. The competition is fierce and the margins low, hence the whole industry is in decline. Sometimes owners lose some of their passion for the business and the business loses its competitiveness. Frequently the owners have not taken the time to devise or implement systems that allow the business to operate without them.

The high growth and early maturity stages are the ones that will bring the highest selling price. Consequently, this is the period we should be in at sales time.

To sell at the appropriate time will require  the owner to take advantage of the growth trajectory and show that the business is a strong money maker.

 

Over here you can do a self assessment and rate your own preparation for exiting.

See here for what prospective buyers want from a business.

 

What Buyers Like and Will Pay More For

 When buying a business, buyers and their representatives (agents,lawyers) create a short list of  a specific set of criteria. Among them are:

  • More Cash and Less Inventory
  • Positive Long-term Contracts
  • Diversified Base of Customers and Suppliers
  • Solid Capture and Retention of Order Data
  • An Audit for the Prior Five Years
  • A Strong Management Team

Not all may apply to your business but probably most do.

More Cash and Less Inventory

Buyers like to see a strong cash position. This comes from smart management of working capital. The seller can increase their cash position by:

  • Collecting  accounts receivables faster
  • Clearing inventory that is not moving
  • Obtaining the most favourable terms for payment from  suppliers

Positive Long-Term Contracts

Long term contracts reduce volatility and uncertainty.Buyers will focus on confirming the sustainability of production. Long-term contracts examples are

  • long-term supply contracts
  • leases on valuable land and buildings
  • leases on production facilities and distribution.

Diversified Base of Customers and Suppliers

The seller should not be dependent on major customers for a large portion of their sales because customers can put pressure and threaten to withdraw their business.

The opportunity to supply a major retailer (i.e. Wal-Mart or Home Depot) or a major manufacturer (Ford or GE) can be a tremendous opportunity for a smaller company, but it can also drain a lot of resources and result in pressure on margins and tremendous customer concentration. While the growth that it drives will increase value, the associated risk of these revenues will reduce value.

Similarly, consider the relationships to suppliers. How dependent is the business on the supplier? How reliable is the supplier?

Capture and Retain Order Data

Without this data, it’s difficult for a buyer to understand how the current sales pipeline compares with previous periods, making it challenging to gauge growth.

How preparation affects the sales price

Get an Audit for the Prior Five Years

Buyers will expect to see several years of audits performed by a public accounting firm. An audit further lends credibility to our company’s financials and decreases the likelihood that a generally accepted accounting principle issue will be uncovered in due diligence proceedings. This type of finding could cause an investor to lower their purchase price.

A Strong Management Team

Companies with strong management teams are generally valued higher than those without them; private equity buyers, in particular, value strong non-owner teams. Since it takes time before new hires begin to contribute to a company’s financial performance, the sooner gaps are filled the better.

It is clear that the preparation for making the business attractive to prospective buyers requires effort. It is an effort well worth while as it will ensure a prompt sale at a high price.

See here : Diagnostic to assess your preparedness for exiting

and here How preparation affects the sales price

If Prepared the Sales Price Will Be Higher

Winners and Losers

There may be a large difference in the price obtained between the Losers (owners who continue to manage their business as before), and Winners,(those that consciously prepare it for sale).

WinnersLosers
Have a plan Sell under pressure
Know potential buyers years in advanceDesperately search for buyers
Time the sale when the price will be highSell at a bad time
Know what their business is worthHave no idea

How To Prepare the Business for Sale

Preparing a business for sale has four components:

  • Timing the sale during high growth or early maturity period
  • Managing for cash
  • Managing for growth
  • Managing so as to earn a higher multiple of earnings

Timing the sale during high growth or early maturity period

Every business will go through four stages of a life cycle. Please see the graph below.

The smart time to sell is when the business has completed its growth stage and is beginning to mature. At this point the business will realise its maximum value.

Too many owners try to sell at the decline stage because they haven’t recognized that their business is in decline. Sometimes the decline is due to increased competition in a mature and no longer growth industry. The competition is fierce and the margins low, hence the whole industry is in decline. Sometimes owners lose some of their passion for the business and the business loses its competitiveness. Frequently the owners have not taken the time to devise or implement systems that allow the business to operate without them.

The high growth and early maturity stages are the ones that will bring the highest selling price. Consequently, this is the period we should be in at sales time.

Managing for Cash

A seller has some time to prepare the business and its elements prior to the sale.A business that generates more cash flow will bring a higher sales price than one that does not.

A qualified finance or accounting professional may be of assistance here. Among the options one may have:

  • Faster turnover of working capital
  • Divesting low return assets
  • Making the operations more efficient
  • Increased margins

Managing for Growth

Future growth will require strategies and executions that yield the following results: A buyer will be looking for a business that is:

  • Achieving a strong cash position
  • Achieving above-average profitability (in terms of return on capital invested)
  • Obtaining rapid growth in revenues by targeting attractive, market segments
  • Developing a strong brand
  • Competing on non-price issues (e.g. quality, service, functionality)
  • Achieving highly consumer centric behaviour
  • Offering a strong value proposition to its market
  • Developing a strong team with high-grade staff & good people

Each of the above will raise the value of the business and will bring a better price at sale.

Grow the Multiple the Buyer Will Pay

You have probably heard investors talk about the P/E ratio. The ratio also called the multiple is the result of the price that the company is worth (P) divided by annual earnings (E).

The multiple is the kind of return the buyer will want on their investment. For instance, if the multiple is ten, the buyer will pay ten times expected annual earnings. If the buyer can expect the annual income to be $100,000.00 the buying price will be one million dollars.

The lower the multiple, the less the buyer will pay. A multiple of five means the buyer will pay five times the expected annual earnings. The seller want the highest multiple, whereas the buyer will want the lowest multiple.

Again here with proper professional help you can increase the multiple a buyer will pay for the business.

Preparing a business for sale is no trivial matter. We have covered the timing of the sale and the preparations we can make to get the best price.

The vast majority of owners don’t plan for the sale of their business, and as a result they don’t take any steps to maximize their return on their years of investment.

That’s a symptom associated with owners that spend too much time working IN their business and not enough time ON their business. These owners don’t think in terms of selling their business at some point in time. Frequently, they view the business as a vehicle that provides them with an income and there is a rather fuzzy thought or picture involving a sale to fund their retirement.

This article served as an overview of the factors required to obtain a high return on the investments made in creating and managing a business.

Over here you can do a self assessment and rate your own preparation for exiting.

See here for what prospective buyers want from a business.

How to Obtain a High Sales Price for Your Business

A business should do more than provide the owner with a livelihood. In addition to fulfilling the owner’s passion it needs to achieve such value that the owner can sell it at exit time for a price that reflects the time and effort invested. After putting in 20, 30 or 40 years the business should be sold for enough to provide a comfortable retirement for the exiting owner. If not, then all the business did was to provide the owner with a job. Building a business should factor in an exit plan and converting into cash the value built up over the years.

At exit time because of age, lifestyle changes, and financial needs, business owners want to realize the value locked up in their business. Too often the offers they receive do not meet their expectations. This is a situation that could have been avoided.

The investment made in building a business over a generation is frequently several million dollars, and too often it cannot be sold quickly. So, to arrange for a quick sale, and to obtain a fair price much preparation should have been made over the years. The guide to such preparation may be examined here but there are four criteria that need to be met to obtain a quick sale and a high price.

 

  1. Sell when business is good
  2. Show prospective buyers a business that shows recent and steady growth in value
  3. Demonstrate high earnings especially in recent years

 

Sell when the Business Cycle is Favourable

Business conditions for a good sale are favourable when:

  • Consumer demand for the product is high
  • There are more buyers for this type of business than there are sellers

 

Create a business that shows recent and steady growth in value

  • The business must show growing revenues
  • The return on assets invested (ROA) should be attractive.
  • The gross margins must reflect or surpass industry benchmarks.
  • The payments made to the owners over the years should be generous.

Managing for growth is not a trivial undertaking. It requires financial, managerial, marketing, and visionary skills. It means much more than having the ability to make the product or deliver the service.

 

Demonstrate high earnings

Earnings should not be less than the industry benchmarks.

Lower earnings than industry average, imply poor management, inadequate vision and weak execution.

Low earnings will reduce the offered price by a buyer and place financial pressure on the seller.

Achieving the above three criteria for a successful exit is not trivial.

All the above require planning, a solid team, the ability to execute plans well, and not simply “managing by the seat of the pants”.

A successful exit will require financial, managerial, marketing, and visionary skills. It means much more than having the ability to make the product or deliver the service.

Learn how to prepare your business for the inevitable exit

Why There’s a Need for an Exit Strategy

Eventually all business owners will need to exit their business.

Reasons may vary but they revolve around the following factors:

  • Retirement because of age
  • Health problems of the owner or their family
  • A change in circumstances impacting family finances
  • Unexpected family issues
  • Change of interests and no longer passionate about the business
  • An unexpected offer
  • Pursuit of new venture
  • Need to raise money
  • Desire to spend more time with family or take care of a loved ones
  • Death of owner/financial difficulties
  • Desire for liquidity and asset diversification on the part of the primary shareholder
  • Competitive pressures. Unable or unwilling to compete..

 

Having established that exiting is unavoidable, the wise business owner will create an exit strategy while still many years away from departure and will run their business with the view of securing the best possible price when that time comes.

Find out how to obtain the best possible sales price for your business