There can be many reasons why you should sell your business, but not all of them will lead to a favorable result. If you take Simon Sinek’s advice and start with why, you’ll find that your reasons for selling your business can have a big impact on every part of the process: From the potential buyers your business attracts, to the valuation it commands, to the ease and speed with which you can complete a transaction.
To put it bluntly, bad reasons for selling often end up in a bad outcome, while good reasons lay the foundation for achieving all of your personal, financial, and business goals for a sale.
In this article, we’ll take a quick look at six good reasons why you should sell your business. We’ll discuss both the business and personal reasons why these scenarios have the best chance of success, and offer a few tips for getting started along the way.
1. You’re Ready for a New Chapter in Your Life
There are a number of reasons why you may have lost some of the energy and enthusiasm you once had for running your business. This is not a failure or a cop-out by any means. On the contrary: It’s perfectly normal.
Every business owner reaches their limit at some point and starts to consider their exit planning options. For most business owners in the lower middle market (annual sales from $2M to $25M) the primary exit strategy for leaving their business is a sale to a third party.
As you feel yourself being “done” with business ownership – ready to free up time and financial resources to do something else – remember that it can take time to prepare your business for sale, find a buyer and get a deal done. Sellers typically need to stay on with the new owner for a transition period after the sale as well.
It can be difficult to get through the sale process when you’ve let “I think I’m ready to move on” morph into full-blown burnout. There’s no such thing as planning too early for the sale of a successful small business.
2. The Last Three Years at Your Business Have Been Great
There are good reasons to sell a business, and then there are bad ones. Some owners think about selling when times are tough and sales are down. Sadly, this is often the absolute worst time to try and attract potential buyers and sell for a meaningful valuation.
The best time to sell is when the last three years’ financial performance at your business look fantastic. Prospective buyers focus heavily on financial metrics like earnings before interest, taxes, depreciation and amortization (EBITDA), cash flow, gross margins, net margins, and trends in topline sales. The time to hit the eject button is when the numbers are all looking good.
Ironically, this is often a point in your journey as a business owner when selling your business is the last thing on your mind. But if you want to attract high-quality buyers – including private equity – and command a strong valuation, this can be one of the best times to sell.
3. You Want to Take Some Chips off the Table
Owning a business comes with risk. No matter how successful your company may be, owning a small business is always a gamble. Anyone who has owned a business through economic shocks like the financial crisis of 2008 and subsequent Great Recession, or the global COVID-19 pandemic, will attest to the fact there is no small amount of luck involved when it comes to surviving as an entrepreneur.
Business owners eventually get weary of the constant risk associated with business ownership. Even during the good times, there is always the question of what may be looming just around the corner.
Your business is typically the most valuable asset that you own … by a long shot. Studies show that the vast majority of a business owner’s net worth (as much as 80%) is tied up in their business. To add another layer of risk, a small business is one of the most illiquid assets you can possibly own.
There’s an old saying in the financial world: You get rich by owning a lot of one thing. You stay rich by owning a little of a lot of things. Nobody will argue with your desire to cash out of that one big thing – the successful small business you’ve built – and put your eggs in a few more baskets.
4. You’re a Proactive Business Owner
You know who you are. You’re a planner. You focus on the future, and try to stay ahead of the game in your industry. You figured out a long time ago how to stop putting out fires at your business and focus on the big-picture, long-term stuff.
If this sounds like you, the decision to sell the business is often one that you’ve wrestled with long before your peers. Regardless, you may not know when and where to start. Don’t beat yourself up. Most business owners have never sold a business before. There’s no reason you should be a subject matter expert when it comes to mergers and acquisitions (M&A). You’ll be hiring those.
Most exit planning professionals and small business brokers recommend that you dedicate anywhere from six months to three years to prepare your business for sale (two years of prep work is about right for most businesses).
You will be in the minority of business owners if you make a concerted effort to plan and prepare before selling your business. A recent study found that only 25% of small business owners had taken the first step to prepare for an ownership transition. You’ll also increase the odds of finding a great buyer, getting a sale price you’re happy with, and sailing through the due diligence process.
Planning in advance also gives you an opportunity to close a valuation gap (i.e., the difference between what your business is worth to buyers and what you want for it), and increase the valuation multiple for your business.
5. The Timing Is Right
It can be difficult to time the sale of any asset. In fact, knowing if it was the “perfect time” to sell investments in stock, real estate, a privately-held business or anything else takes hindsight.
With that said, there are definitely windows of opportunity when the trifecta of business sales occurs: The business is ready, the owner is ready, and the market is good. If these three planets are in alignment, this is as close to perfect as you’ll get when it comes to timing the sale of your business.
Keep in mind that every window that opens will eventually close. Many business owners ride the wave of business ownership too long. They sense that the time is right to sell, but decide to hang on just a little bit longer. This often ends up being a mistake that cannot be undone: There are just too many variables that can impact both the sale and value of a business – personal, business, and economic. If the timing is right, go for it!
6. You Want Your Business to Achieve Next-Level Growth
Many business owners decide to sell because they know there is plenty of opportunity for the business to grow, but also realize that they’re not the ones to achieve it. Growing a business from $0 to $7 million is one thing. Growing from $7 million to $30 million usually takes an entirely different set of skills and resources.
If the legacy you’d like to leave is a business that continues to be a solid employer in your community and an industry leader, then you’ll want to think about what type of buyer can make that happen. Private equity groups with operational expertise in your industry, strategic corporate buyers, ESOPs (Employee Stock Ownership Plans), and management buy-ins can all be good options for taking your business to the next level.
Why Are You Waiting? Start the Selling Process Now
If you fall into any of the categories above, ask yourself why you’re waiting to sell your business. A recent article of common reasons business acquisitions fail put “indecision” at the top of the list. Going into a sale process for the wrong reasons often leads to second guessing, faulty thinking, and failure to complete a successful sale.
Having good reasons behind selling your business gives you the confidence to know that you’re making a sound decision for your future, and the future of your business. Your reasons for selling will be the foundation – and set the tone – for the entire sale process.
The advisors at Allan Taylor & Co. are ready to help you explore your reasons for a sale, and start getting a plan in place. Why wait? Contact us today.