Multiples matter, but there is no single answer to the question when should I start selling my business. Your situation, your business model, yourself, the market, your desired multiple... They all factor into the decision. In this post, we will cover a few of those factors and the consequences of choosing the wrong time - and yes! There are plenty of wrong times to start selling.
When Should I Start Selling My Business
The best answer most business advisors would give to this question is before you start or buy a new business. Before you get caught up in the wind storm of activity that going into establishing and running your business, you have a little time to breath. The decisions you make about how you might exit or sell the business at the end of your venture can inform the kind of structure you chose, how you staff the company, how you market, and which way you turn as you face each decision fork in the road.
"If you don't know where you're going, any road can take you there." - Cheshire Cat
Being a business owner requires the owner to make decisions - a lot of decisions. The value of a business at any given time is essentially a function of the total decisions made about that business by the business owner and his or her advisors. Having a clear exit strategy in place early on helps business owners to steer their growing enterprise and know when they're reached the point when an exit makes sense. Knowing what a healthy Exit should look like also helps a lot in determining if opportunities to exit would be a win or a loss.
The sooner you know where your business is going in terms of your exit strategy, the easier many of these decisions can be. If you have no idea how your business is going to unwind when you're done - or what being "done" looks like - then your business will go down any road in front of it. This is not usually the best way to get the highest multiple on the sale that you can.
Operating vs Selling
There is a difference in the way a business looks on paper when it's being operated for growth and/or sustainment vs what it would ideally look like on paper for sale. During the operating phase, for example, mitigating tax exposure is usually a priority. Tax returns are optimized to reflect a business in the operating state. The amount of revenue shown on the bottom line is often as low as possible. Any excess at the end of a fiscal year may be reinvested into the business, for example, rather than simply exposing those earnings to taxes.
When selling, however, exposing the potential of a business to a new buyer becomes a priority. In this state, earnings are often reported and exposed to tax as a way to get potential earnings on the record. Business buyers will be looking at tax returns when considering buying a business. Sellers often want buyers to see as much as possible and leave it to the imagination of the buyer what they might like to do with earnings.
In order to adjust the business model from growing or operating to selling mode takes time. It takes at least a year to get the selling model dialed in and ensure that a seller has a full year (or more) of optimized earnings to report and show.
When a seller starts wondering when should I start selling my business, most business advisors will say at least one or two years before the sale to make the switch we just described work. A last minute sale usually means lower multiples.
Selling a business is not easy. Entrepreneurs are generally not afraid of a little work, but physical and mental work are only two components of a seller's lift. There is an emotional toll that most sellers experience as more intense than they anticipated. During a sale, emotional overwhelm can manifests itself in cold feet, aggressive behavior, passive aggressive behavior (slow rolling or rejecting good offers), etc.
Helping business owners as we do for a living gives us a front row seat to the regret many owners feel after-the-fact when an otherwise good deal passed them by for no other reason than they were not emotionally ready. Business owners wondering when should I start selling my business are wise to give themselves plenty of time to adjust to the idea of the sale before the sale takes place.
Getting Higher Multiples
Pretty much every business owner is aware (or quickly becomes aware) of the value of managing a financial statement. The top line matters, but the bottom line matters more, right? Of course! But the bottom line is not where the story ends when it comes to a business value.
A multiple is easy to understand. At a high level, its the number a business owner can multiple their earnings or EBITDA in order to arrive at a value the market is generally willing to pay. A business with $100k EBITDA selling for a 1.4 multiple would sell for $140,000 if we exclude all other factors like inventory, real estate, the cost of capital expenditures, etc.
Two businesses with exactly the same bottom line can have different multiples for a number of reasons. Industry, location, and market cycles play a role, but there are also some things the the business owner can do themselves to increase their multiple.
- Operate the business for sale - exposing as much discretionary earnings as possible for at least a year
- Keep good books and records - people will pay more for a well run (and well documented) business than for one that manages from a spreadsheet or keeps records in shoe boxes
- Employ good advisors - advisors like those you'll find with Transworld Business Advisors have 40+ years of perfecting the system we use to prepare businesses, prepare the seller, expose the business to the market, attract and organize buyers, screen buyers, bring in experts, and more. Start early!
- Don't stop operating - buyers typically use leverage to pay for business acquisitions. Lenders consider the business in their calculation for how much they're willing to lend. If a business owner takes their foot off the gas in the months leading up to the sale and the business starts to fade, lenders will see a declining business and not want to lend against it.
- Fix problems - if a business has a revenue, expense, exposure or reputation problem, fix them before the sale! It may take a little while to bring customer reviews up, but gathering positive reviews for a business that has a string of negative reviews is a priority. If an expense is too high, find ways to lower it. If a business owner doesn't know what the industry standard is for a given expense, ask an advisor. Many expenses are benchmarked.
In Summary - When should I Start Selling my Business?
The answer to the question when should I start selling my business is not absolute. It might be more appropriate to put the answer in context of business phases.
It's never too soon to start, but it definitely can be too late to get good multiples on a sale. It doesn't cost anything to reach out, so call us today at 301-423-2601 or connect via our website at https://www.tworld.com/locations/frederick/contact-us/