Ideally, you want to sell while your business is performing well, not after sales have flattened or declined. You want to be selling from a strong hand, not a weak hand.
Many business owners wait too long to sell because they want to see one more year of strong performance. That can become a moving target. Selling into strength is something you should be thinking about now, while the business is performing well.
Look at your performance over time. A good rule of thumb is to have at least two years of stable or growing financial performance before approaching the market.
What you don't want is a lumpy trend. A recent loss can also affect what buyers are willing to pay, even if sales have been relatively stable. To understand how earnings factor into valuation, read What Is Adjusted EBITDA and Why Does It Drive Your Valuation?
Of course, the best time to sell from a financial standpoint isn't always the right time for the business owner. Sometimes personal circumstances make the decision for you.
Oftentimes business owners know it's time to sell because there's no clear successor to take over the business. Their children may not be interested in running the company. Or they don't have a strong senior management team in place that would be interested in, or capable of, buying the company from them.
So you've built a business. It's grown to stability, or it's still growing. But because of your age, your personal circumstances, and the lack of a family heir or a logical management heir, a sale really is the only way to monetize what you've worked so hard to build.
Your net worth is probably tied up in your business. For many, many business owners, a substantial portion of their net worth is tied to their business. You might know it's time to think about a sale when you're approaching retirement age and realize that to retire, you're going to need to get liquidity from this valuable asset you've built over the years. And really, the only way to do that is to sell.
There are a few things you'd want to clean up before you put your business in front of buyers.
Outstanding litigation. You don't want to sell if you're in the middle of a lawsuit. If you have outstanding litigation, get it cleaned up before you join our platform.
Corporate hygiene. You want your books and records in good order. Depending on how your business is structured, that means having the following documents organized and available, where applicable:
Tax and estate planning. Pre-sale personal financial planning can help owners identify ways to minimize tax liability and maximize cash proceeds.
Owners sometimes wait until a transaction is imminent to involve their advisors. Starting that work earlier gives them more time to consider available strategies. Even starting three months before pursuing a sale can make a meaningful financial difference.
So loop in your outside tax advisor or CPA so they're aware of what's going on. If they recommend any tax preparation or filing cleanup, get it done. If it's relevant to you, talk to your estate planner or financial planner too, and put in place any estate planning and tax management strategies they suggest in advance of an actual sale. For a closer look at who should be in your corner, see Preparing to Sell Your Business: Key Advisors in the Process.
If you've had a material down year, it can have a real impact on valuation. If you have a particular timeframe or valuation in mind, and you have the benefit of time, allowing your business a few quarters or even a year or two to recover could put you in a stronger position.
But if for whatever reason you feel like an exit from the business is what you need, you don't have to sit on the sidelines. DirectExit is a way to explore what a sale would look like confidentially, without committing to a transaction. You can begin connecting with potential buyers and gauging their interest, even if your business has experienced recent underperformance.
Give yourself time to explore. If you have a particular exit date in mind, don't wait until the last minute to explore your options. Transaction timelines vary considerably. Some sales can be completed within a few months, while others take substantially longer depending on the complexity of the business, buyer requirements, financing, and due diligence.
You can also use DirectExit's library of resources to learn how to prepare for a formal sale, from organizing your documents to understanding unfamiliar financial terms. Our glossary of essential M&A terms for business owners is a good place to start.
Readiness isn't about having every detail settled. It's about understanding your position and knowing which issues deserve attention before a sale.
Sell into strength when you can, address the red flags and get your house in order. But don't confuse being ready to sell with being ready to explore a sale. Those are two different decisions.
Join DirectExit and start exploring your options today.