This article was updated December 2020.
As a business owner, possibly the most important decision you’ll make is when to sell your company. This can be quite intimidating for anyone, especially if you’re not familiar with the intricacies of a mergers and acquisition (M&A) transaction process. This can also be an exhausting and emotional process if you’re unprepared.
To determine if this undertaking makes sense for you, you’ll need to answer some key questions: is now the right time for me, and am I actually ready? The answers to these questions depend on a number of financial and personal circumstances, which aren’t always within your control.
The following are a few considerations that can help you determine if it’s the right time to sell your company.
It’s important to consider the economic context in which your potential sale would take place. Here are some external factors to consider.
The health of the capital markets—including equity and debt—will have a large impact on the value that can be achieved when selling your business. Public equity valuations are commonly used as a benchmark to determine the fair value of similar businesses. If public equity valuations are relatively high, the valuation for a similar, privately held business will benefit.
While many data points may be considered, the most common metrics for valuation are usually these two ratios:
- Enterprise value-to-earnings before interest, taxes, depreciation, and amortization (EBITDA)
- Enterprise value-to-revenue
Financial buyers, such as private equity groups, commonly utilize debt to finance their acquisitions, so prevailing interest rates and leverage ratios will play an important role in determining a buyer’s willingness and ability to pay. Lower interest rates make the use of debt more affordable, while higher leverage ratios indicate a bank’s willingness to provide more capital to complete the acquisition. The more debt a buyer can utilize, the less equity they’ll need to contribute and the higher the price they’ll be able to pay.
Other Economic Factors
Other economic conditions will also have an impact on valuation, including consumer confidence, the geopolitical environment, commodity pricing, and inflation.
Each industry also has specific factors that will impact the attractiveness of an asset. A growing addressable market, high barriers to entry, and industry fragmentation could all be catalysts for increased M&A activity and premium valuations being paid.
Even with favorable economic conditions, a business owner looking to complete a transaction still needs to be prepared and ready to transition to new ownership. Here are two aspects to consider.
Internally, an experienced and capable management team will allow for a smooth transition and is necessary for the business to carry on without missing a beat. A smooth transition will also signal to employees, customers, and suppliers that a change in ownership doesn’t necessarily mean a change in business-as-usual.
In addition to key internal employees, third-party transaction advisors will be heavily relied upon to prepare the company for a sale and guide you through the transaction process and beyond.
As a part of any sale process, a seller can expect buyers to perform thorough due diligence. This diligence process is comprehensive in scope and can be excessively time consuming if you aren’t prepared for it.
A buyer will likely scrutinize the following:
- General corporate information
- Financial results and projections
- Tax matters
- Legal issues, contracts, and government compliance
- Intellectual property
- Customer base
- Supply chain
- Management and employees
Across these areas of focus, there can be hundreds of individual items to produce or prepare. While extensive, they will be vital to completing a sale.
One of the worst things that can happen during a sale process is for the buyer to discover a material issue that the owner was unaware of. This often results in a reduction of the purchase price, additional scrutiny in all areas of the business, or even termination of the transaction.
A seller can significantly decrease the risk of a negative outcome by engaging professional advisors who are well-versed in M&A transactions. Hiring the right advisors early can help a seller:
- Prepare for a rigorous diligence process
- Identify areas of weakness that could be cleaned up
- Pinpoint areas worth highlighting to prospective buyers to make the business more attractive
Perhaps the most important factors to determine, and likely the most challenging, are personal in nature. You’ll want to consider your next move and whether you’ll have enough to live comfortably before beginning the transaction process.
As a business owner, you’ve set many goals throughout your career and leveraged a variety of strategies to achieve them. During the consumption phase of your financial plan, using the same strategy can pay off. For many business owners considering a transaction, some of the most important goal-related questions include the following:
- What will my expenses be, and how much money do I need to live comfortably?
- What sale amount should I be targeting from my buyer to maintain a comfortable lifestyle?
- How much can I afford to leave to my family or charity immediately or at the end of my life?
- What are some safe investment avenues to consider to meet my financial goals?
Having answers to these questions ahead of a transaction provides clarity and comfort to business owners and their families as they go through a sale process. Knowing the bare minimum amount of proceeds you’ll need to achieve all of your goals will assist in making clear decisions throughout the negotiation process.
We’re Here to Help
Preparing for and completing a successful transaction takes assistance from a number of parties and requires a highly coordinated effort. The more time and consideration you invest up-front, the more likely you are to have a smooth transaction process—and a successful outcome.
For more information about preparing for a sale, negotiating a deal, or putting together a post-transaction financial plan, contact your Moss Adams professional.