This question has been posed at some time to every business broker in the United States. Like they say, “timing is everything” which is no less true when it comes to business sales. Timing the sale of your business can enhance or reduce the profit from the sale.
The simple answer to “When should I sell my business?” is counter-intuitive. Your best return is when you don’t want to sell it. Typically, this is when the business is performing at peak, staffing is in great shape and all engines are firing success and profitability. This is the point, however, that is optimal for the sale of your business.
Many business don’t sell at the optimal point. It could be that the business hit its peak but the seller burned out and is in maintenance-mode. This doesn’t mean that business can not sell but it won’t sell for peak value. Indeed, many buyers like buying a basically good business that is more affordable and then activating their great ideas and enthusiasm to grow it. We have seen this pattern time and again.
When you are not selling your business that is financially performing at its optimal level or in status quo, that leaves the you with the sub-optimal times for sale. So maybe the real questions are “When should I NOT sell my business?” “When should I avoid selling my business?” or “When are these sub-optimal times?”
When To Avoid Selling Your Business
#1 Your financial documents show your business is performing poorly
Without a doubt, one of the first things that buyers will examine about a prospective business is financial performance. Buyers will typically examine the last 3 to 5 years of financial statements such as tax returns and profit & loss (P&L) statements. Your business may not be appealing if it shows declining sales, declining profit, smaller gross margins, too many personal expenses run through the business, delayed A/R, poor record-keeping, lack of documentation and the like.
Simply put, when your business is not profitable and the trend lines go down in terms of profit, your business becomes much harder to sell. When your financial statements are incomplete at best or shady at worst, then your business is not going to appeal to most, if any, buyers. The financial records are the proof in the pudding and when yours look bad, then no one is going to eat what you’re serving.
#2 Your business is part of a declining industry
Call is the Amazonization of small business but many a small business has gone by the waste side. When your industry is on the decline and way past its peak, it may be too late to sell. Online shopping and big box stores have caused traditional retail shops to dwindle unless they are part of a shopping experience.
While a business may have been successful in its hey-day, that goodwill will dwindle too when its no longer relevant or the owner has not found a way to morph the business so that it’s more contemporary.
#3 You the business owner are in distress
Whether its burn-out, disability, divorce, or other unfortunate stressors, selling when you are distressed is just a bad move. It’s really the worst time to sell. Buyers understand your vulnerability and sad to say, they will take advantage of it.
Additionally, when you are under distress, you underperform in your business and risk compromising your relationships with employees, vendors, customers, etc. It’s also a point where some small business owners want to just throw in the towel and walk away.
Selling a business takes 6 to 12 months. So if a business owner comes in burned out or in distress, we really have to determine whether they can continue working in the business and add on the additional pressures of managing a business sale. Effective business sales occur when business owners properly plan for their sale; so selling during crisis when the owner is compromised undercuts optimizing value from the sale.
Of course, there are times when a crisis forces the business owner to choose to sell because the situation is unavoidable. While it may be unavoidable to sell, where possible it is better to wait it out where possible. It’s usually just not ideal to sell in the midst of personal distress. In the midst of chaos, the business owner is stressed, distracted and drained. They tend to become erratic and unreasonable in their decision. The business owner may not be willing to listen to reason or their business advisors. They may become non-negotiable and unrealistic regarding the selling price. They may sabatoge the sale. They may drag, delay and become ineffective in supporting the sales process and drive buyers away by being unreasonable. They know they are disadvantaged at the bargaining table and frustrate the process.
If a personal crisis arises, move quickly or hold off selling wherever possible. Avoid at all costs trying to sell in the midst of worsening chaos.
#4 Your key employees quit
Like a divorce, when key employees quit it hurts. It can also lead a business owner to have to pick up the slack and burn themselves out. It can also reduce the desriability of the business for sale. Many buyers look for long-term, highly competent employees. When this does not exist, buyers are less interested.
Having good management in place is desirable for any business sale. When that part is missing, selling the business becomes much harder and value can plummet. The best solution is to replace and train ASAP and then go on the market to sell.
#5 Your business is too small to justify a purchase
The smaller the business, the greater the risk. When the business is too small and completely hinges on the business owner, the profitability may be insufficient to warrant a sale.
If a business has not scaled, then that sends a message that it can’t or that it wasn’t worth the additional capital, time, risk, etc. This may not be encouraging to buyers particularly those that want to buy a business for potential expansion.
Assuming an owner/operator buyer, the business has to generate sufficient cash flow to provide the new owner a good salary, benefits, and remaining cash to reinvest in the business and/or service the debt on the acquisition loan. When a smaller businesses doesn’t provide sufficient cash flow, buyers will pass where there’s insufficient earnings.
#6 Your business structure maybe unworkable.
Sometimes the issue is that the business structure is too complicated to work right for anyone. If a business owner loses profits by hiring to service the business rather then generate new profits, the business structure may be unworkable for anyone. Also, where technology does not allow the owner to leverage their time and resources, then the business may also be unworkable for any owner-operator.