At HMT our Partners are often asked “when is the right time” to sell a business, and in general our stock response is that it is relatively easy to conclude when is the wrong time to sell, but one can only tell if the timing of an exit was “right” with the benefit of hindsight. Almost more than anything else vendors fear getting their timing wrong, being taken advantage of, and ending up with “sellers’ regret”.
It may be reassuring to know that hardly any of the many vendors we have advised have ever articulated anything other than relief and delight once the deal is done. Like many things in life, slightly sub-optimal timing is worse in the contemplation than in the reality. It is also worth reflecting that you must anticipate the “right time” at least 6-12 months in advance of your optimal exit date, since that is how long the process itself can take.
So. In the absence of a celestial signal, how are business owners supposed to decide when to plan an exit and when to “press the button” on a process?
Our first response to this would be that if you are “ever ready” to sell then you will be in a far better position to take immediate advantage of benign market conditions, changes to tax legislation, an unsolicited approach or (in a worst-case scenario), illness or other changes to personal circumstances.
There is a direct analogy here with estate agency; if your house is well maintained, well presented and immaculately tidy, you can put up a “For Sale” sign overnight. If it needs a new kitchen or bathroom, one of the bedrooms is painted black, the garden is a jungle and you need a thorough declutter before you move, then you have some serious work to do before you can expect to generate buyer interest at market value.
As a business owner, if you are disciplined about understanding your value drivers, have strong management information, have the substantive elements of a data room in place, understand what specific aspects of your business are going to be the focus of potential buyers, have thought about management succession and have managed your PR, then you are going to be able to go into a process very swiftly, allowing you to respond effectively and opportunistically to external changes which might indicate that for you it is the “right time” to sell.
If you are ready primed for a process, the decision-making criteria are then a combination of personal and market factors. If you are ready to retire, or to move on to new challenges, then now is probably the right time to sell, unless there are clear signals that now would be the wrong time.
What might those signals look like? A poor trading performance which cannot be clearly explained by timing differences, short term factors (like COVID-19) or changes in strategy; Client relationship issues, particularly with key clients; Strong evidence of dips in market multiples for comparable businesses, an oversupply of comparable businesses on the market, a short-term need for major capital investment, significant market uncertainty which will directly affect your business, a fall away in sales pipeline…… all of these might be reasons to pause and reflect.
And how might you identify the “right” time? A wave of transactions in your sector at high reported multiples, more than one unsolicited approach from a would-be buyer or investor, strong demand indicators for your business because of macro-economic or wider market factors, a particularly positive projected medium term growth curve (perhaps on the back of a new product or service launch), an “oven-ready” management team keen to participate in a private equity led acquisition. All of these might be reasons to jump into a process.
At the end of the day, the right time to sell is dependent on generating the right deal to take, and you don’t have to conclusively decide whether that is out there until the documents are laid out before you ready to sign. Starting the thought process is not a commitment to sell, it just gives you the best chance for no regrets.
For some vendors, based on these factors, 2021 will certainly be the right year to sell their business.