Should I Sell My Company Now?

By Brad Mart, President, Mart Partners

Many business owners want to know if it is time to sell their company. While it is a good question to ask, it is usually not asked often and early enough in the development and management of a company.

Too often business owners are forced to make exit decisions without any advance planning based on factors that are largely out of their control including health, divorce, and owner disputes.

According to the Estate Planning Institute, 80% of U.S. businesses will be sold over the next 10 years, yet 49% of all business owners have done no exit planning. This issue is compounded by the fact that most business owners have 80% or more of their net worth tied up in their company that is less liquid and more risky than other potential investments.

Most successful business owners have spent decades building a significant business, but by the time they reach potential retirement, they have not given thought to key questions they should regularly be asking:

• How much is my company worth?
• What are my exit options?
• What will I do with my personal and professional time if I sell?
• Who should be on my team of advisors to navigate a potential sale?
• What level of net proceeds do I need to maintain the lifestyle I would like to have?

As stated by the Exit Planning Institute, exit planning is a smart business strategy. Exit planning should be incorporated into at least the quarterly and annual planning process of operating a business.

This starts with discussing exit planning every 90 days to evaluate and agree upon current exit planning topics including timing, valuation requirements, exit options, opportunities to increase company valuation, and an exit or hold decision.

On an annual basis, owners should secure a business valuation from a certified valuation expert to continually measure not only profits and losses, but also the amount of annual business value increase.

While there are many strategies available to reduce the tax consequences of a business sale, there is usually no better way to increase the net proceeds of an exit than increasing the value of the business. These value increases come from increasing sales and decreasing costs to maximize cash flow in the one to five years preceding a sale.

If an owner wants to increase cash flow and therefore valuation, additional investment is often required in the form of capital expenditures, new hires, and use of outside consultants.

Only through regular exit planning analysis and discussions can business owners determine whether they should exit or hold their company. When business owners want to decide if it is time to exit or hold, there are multiple factors to consider including:

1. What’s My Number? A business owner must determine if the expected net proceeds of a business sale will cover expenses required for the desired lifestyle going forward. To answer this question, they must rely on a certified valuation expert and wealth manager or financial advisor.
2. What’s My Passion? How much energy and passion does the owner have toward their business? It is important to note that business cycles are typically five to seven years in duration and owners who attempt to “time the market” by selling at the top need to be prepared to hold the business for multiple more years to equal current valuations if there is a downturn. While it is important for owners to get advice and opinions from trusted advisors, in the end the only one who can answer this question is the business owner themselves.
3. How Can I Increase Value? An owner should evaluate where value increases may come from in their company and determine if the number of resources, risk, and time required are acceptable and appealing. It is important to note that business value is heavily determined based on trailing twelve months (TTM) of cash flow. This means that to get the maximum increase in value for the company, the improvements need to be implemented and in operation for at least twelve months before the sale.
4. What Will I Do? An owner should strongly consider how they will use their time and energy after a potential sale. A significant number of business owners are dissatisfied with the sale of their businesses and much of it results from not fully considering the impact of losing their life’s work in building and managing their company.

In the end, there is no clear and obvious answer to the question posed by business owners about if they should sell their company now. However, with continued and regular efforts to understand objectives, timing, options, and value, an owner can make the best decisions about whether to exit now or hold their company for a sale in the future.