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Time to sell your business? Not so fast.

Bobby L. Hickman

October 15, 2007

When is the right time to sell your business? When you're ready to retire? When business drops off and times are tough? Neither are ideas times, experts say. The best time to sell is often when an exit is the farthest thing from your mind.

"The great time to sell the business, unfortunately, is not always when the owner believes it's the right time to sell," says David J. Karnofel, senior V.P. of The March Group, an investment banking firm that works with small and mid-market companies. Far too often, entrepreneurs determine an exit strategy based on personal reasons. They may be nearing retirement age or their last child has completed college and their spouse is ready to retire. But that's not necessarily the best time.

The key to maximizing value is to look beyond personal factors to the current market cycle. Karnofel says the basic principles of supply and demand apply to selling your business just as it would to any product or service. When buyers are in the market actively looking for businesses to buy, prices go up. When buyers are not in the market, or when sellers flood the market, prices go down.

Ironically, when buyers are in the market, sellers are not – and vice versa. Karnofel says buyers become active when market conditions are favorable. Positive factors such as a growing economy, low tax rates, low interest rates and a strong stock market bring both domestic and foreign buyers.

However, those market conditions also make it unlikely that entrepreneurs are looking to sell their companies. “When times are good, profits are up, owners have no interest in selling," Karnofel notes. “But that's the optimal time to sell."

Aside from timing, a major issue is determining a reasonable value for your company. Karnofel says there are two ways to address that question. One is the pure financial value of a company, which is a function of future cash flows, rates of return, present values and so forth. However, “ the real market value – what the business will actually sell for – can only be determined when you're sitting in front of a potential buyer, and you're determining what a buyer or a particular group of buyers is willing to pay for the business."

Business owners get so caught up in running their businesses," Karnofel says, “that they do not consider how to market their business." Most people only sell one or two businesses in their lifetime; they've never done it before and they may never do it again. Karnofel says advisors can work with clients to develop an exit plan, which becomes a road map to help the client achieve their objectives.

Investment banks can also help the client find a buyer when it's time to go to market. “ Buyers are typically telling us in the marketplace what they're looking for – certain industries, certain types of businesses, of a certain size," Karnofel says. “Our job is to take what buyers identify and try to match that with the appropriate client. When we take on a client, we look at what the market tells us they are looking for and then position that company properly among those various types of buyers."

Currently, it's still a good market for sellers, Karnofel believes. While some industries are hot at the moment – such as software, services, technology and security-related businesses – the potential value of an individual business is the most important factor. “It's mostly a matter of what the business will do in the future – its prospects for generating positive cash flow."

Even if you're not ready to sell your business yet, there is an alternative that could allow you to maximize value without leaving the firm. Private equity firms have become the driving force in the M&A market over the past five years, Karnofel notes. The business model is structured to buy other businesses, build them up over a three- to five-year period, then exit. "That lends itself very well to a number of different strategies used by many sellers," he says. “Some sellers in the market have finally realized that even though they are not ready to retire, it may be a good time in the marketplace to take their chips off the table." Private equity firms may simply buy a controlling interest and have the owner stay on in the business with a reasonable piece of equity. Together, they grow the business and participate in the exit strategy several years down the road.

Regardless of whether you want to sell your business now, grow it for a future sale or take on a private equity partner, the key to the decision remains market timing.

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