Q: I am seeking to sell my business, but I'm afraid it may not be a good idea to do this in a down market. Should I wait? What are my options?
A: Assuming that value optimization is your goal, there are really three factors that affect a business owner's ability to get the highest value for his or her business: the performance of the business, the state of the industry/economy/M&A markets, and the owner's personal timing and situation. Unfortunately, it may be difficult to get all three "stars aligned" at the same time. While caution is warranted, there are many reasons why selling a company can still be a very viable, and potentially lucrative, exit option during a time of economic decline.
1. Business performance. It is always easier to sell a business that is exhibiting either growth or stable financial performance. Buyers generally want to invest in a company that will provide them with a good return on their investment and are willing to pay more for a business that has a positive trend and outlook. If a buyer feels their own contribution of strategic direction, resources or capital to the business will be the impetus for future growth, they are likely to pay less for that business than one that is supporting growth on its own. In addition, if the company's future success appears to be threatened (large national competitor is entering the market, technological advances are outdating company products, etc.), not only may the value of the business be affected, but the marketability of the firm may decline as well.
2. External factors (industry, economy, M&As). The climate in which a business operates, both on a microeconomic and macroeconomic basis, can also affect business valuation and marketability. An overall economic downturn can result in the tightening of corporate belts and a reduction in acquisition activity. In the same manner, a decline within a specific industry or geographic region can also prompt a reduced appetite for private company acquisitions in those areas. Additionally, a decrease in public company price-earnings ratios tends to produce a corresponding "trickle down" effect for the multiples paid for private companies.
However, though the recent economic slowdown has produced a notable decline in acquisition activity, activity continues to remain well above historical norms, indicating that there are still many buyers looking for viable targets. These buyers, however, are being more diligent in their purchase criteria, seeking primarily healthy, profitable target companies.
3. Personal timing. It is my experience that a shareholder's sale of his/her business is rarely due to purely financial reasons, but rather is driven by other factors, such as retirement, ill health, family issues, partner dissension, divorce, difficult competitive environment or burnout. Although some of these events may be foreseen or anticipated, many of these events can occur unexpectedly, catching a business owner off-guard. Therefore, advance preparation for a sale can be a business owner's best weapon. For example, obtaining a periodic valuation of the business can be an excellent tool to gain an understanding of the market's view of the company. Getting the company's books and legal affairs in order is also important. By preparing a company for sale well in advance of the event, the owner is well-positioned to either execute an orderly exit strategy or to take advantage of market upswings and unique selling opportunities.
Therefore, the fact that either the economy or your industry is exhibiting a downturn should not be the only consideration in your decision to sell or hold on to your business. If your company is doing well and demonstrating growth, and issues in your personal life are driving the sale, it may still be a lucrative option for you. Keep in mind that holding on to your business may also pose a risk, as the future is unpredictable, and there is never a guarantee that bad times will not get worse. You should carefully contemplate each of the above factors when deciding whether to sell your business or wait until business conditions improve.
Loraine MacDonald is director of advisory services at USBX, an investment banking firm specializing in the mergers and acquisitions of small to midsized businesses. She has been involved in the valuation and sale of privately-held businesses for over ten years.
The opinions expressed in this column are those of the author, not of Entrepreneur.com. All answers are intended to be general in nature, without regard to specific geographical areas or circumstances, and should only be relied upon after consulting an appropriate expert, such as an attorney or accountant.