Classic Mistakes in Exit Strategy: Waiting Too Long to Sell Your Business « Sterling X-AG Blog

Classic Mistakes in Exit Strategy: Waiting Too Long to Sell Your Business « Sterling X-AG Blog

July 23, 2010 X-AG Leave a comment Go to comments

Despite all the historical examples and hockey stick analogies, knowing the right time to sell your business is tough.

Although selling too early may not get you the absolute best deal, selling too late can permanently destroy value in your business. Remember that the value of your company isn’t based on what you did today, it’s what you can do tomorrow. If your company begins to demonstrate that it is reaching the limit of what it can do, the valuation will suffer. It is important to continuously invest into your business to maintain a strong pipeline even when planning to sell. Your business will achieve a higher valuation by fulfilling the strategic needs of the buyer whether it is a geographic expansion or a new line of products and services. Attractive companies for M&A are growing businesses that can demonstrate a value not present in their buyer’s operations.

When you sell your business, it is likely that the buyer will want you to have a stake in the continued development of the combined business for the next few years. In addition to compensation for participating in the transition process, part of your earnout could be based on your company hitting certain revenue or earnings milestones after it is acquired and in that case it makes even more sense to sell when you have confidence that the business has growth potential in the next year or two.

Ultimately, selling your business shouldn’t just be about cashing out; it’s a way to strategically reduce and diversify your personal financial risk. Small to medium sized companies have a significant amount of business risk associated with economic and market conditions that are beyond the control or influence of most individuals; these same businesses also have a significant amount of the owner’s net worth tied up in the business. As we have seen in recent years, market turbulence of any variety (from financially distressed European governments to Wall Street selling sub-prime derivatives) will have undesirable effects to your bottom line.

Many business owners choose to wait on selling their business only to find that the market has passed them by. Some believed that squeezing out one more year’s worth of growth would drive a higher purchase price. Others sought to mimic the success they read about in newspapers and media. In truth, your financial statements are only a small piece of the valuation formula and most business owners who were fortunate enough to warrant media attention were in the right place at the right time.

To put it simply, timing is the most critical aspect of selling your business – not only in the lifecycle of your company, but also the state of the market. Even in today’s economic climate, technology M&A is strong as buyers are seeking to acquire companies to build their financial health as well as reduce their business risk by diversifying their product offerings and client base. Chances are that your company has a narrow window of opportunity for M&A before it stops growing and begins to demonstrate itself as a low growth potential business. In addition, by waiting too long you risk that the best buyers for your business acquire one or more of your competitors and either don’t have the strategic need or cash to buy your business when you are ready to sell.

Since your valuation is dependent on the health of your business and the value it adds to a buyer, devote your energy towards building your business rather than focusing on the concept of “maximizing your valuation.” Chasing an abstract idea of value will likely motivate you into missing your window of opportunity and ultimately exiting for less.

By Eric Michaels, Senior Analyst, MergerTech Advisors
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