If you are considering selling your business, you are confronted with the question, “should I sell now or wait?”. You may have received inquiries from private investors (or their advisors) offering to buy your business. Potential acquirers may have approached you during conferences or at a trade show, to gently probe your interest in selling. Maybe you have been disappointed in the opinions of value you’ve seen suggesting what a business like yours would garner from would-be acquirers.
According to the latest analysis of some 20,000 business owners, the average offer made by acquirers is just 3.7 times pre-tax profit. Companies with less than a million dollars in sales garner significantly lower multiples, while larger businesses may get closer to five times pre-tax profit.
Given the paltry offer multiples, you may be tempted to hold on to your business, uncertain about selling. After all, you might reason that if you hang onto your business for four or five more years, you could withdraw the same amount in dividends and other owner benefits as you would garner from a sale and still own 100% of the business to sell at a later time.
It is a reasonable question and there are some significant issues to consider.
1. You Shoulder the Risk
The biggest downside of holding on to your business, rather than selling it, is that you retain all of the risk. Most entrepreneurs have an optimism bias, but you need only remember how life felt in 2009 to be reminded that economic cycles go in both directions. While the business economy may feel good today, sometime in the next five years the environment could get bumpy for a lot of owners.
2. Quality of Your Personal Time
For most business owners the enterprise is constantly on their mind. Yes, in theory you can do other things like play golf or enjoy a bicycle trip through Tuscany and still own your business. But as long as you are the owner, your business will always occupy a large chunk of your thinking capacity. This means family fun, vacations and weekends, and hobbies are always tainted with business matters. Also, be sure to count your blessings if you are healthy and planning to retire. On more occasions than I care to count, I have witnessed owners that fail to make the decision to sell before health becomes an issue.
3. The Need For Additional Capital
Let’s say your business generates $500,000 in Earnings Before Interest Taxes, Depreciation and Amortization (EBITDA), and you could sell your company for four times EBITDA or keep it. You may argue it’s better to keep it, pull your profit out in the form of dividends, and capture the same cash in four years as you would by selling it. This theory breaks down in capital-intensive businesses where there is usually a big difference between EBITDA and cash in the bank. If you have to buy machines, finance your customers, or stock inventory, a lot of your cash will be locked up in feeding your business and the amount of cash you can pull out of your business each year is a fraction of your EBITDA.
4. Is Your Business Ready
While circumstances may dictate that you should sell, the question remains if the business is “ready” to be sold. In other words, have you positioned the business to be attractive to a buyer? If not, the value of your business could be discounted and generate a lower selling price than you had hoped. To make matters worse, you might even be forced to take a larger piece of the selling price over time.
5. Use A Different Lens
Look at your business through the eyes of a potential buyer. Would there be elements of your business that you could change to make it more attractive? For example, you may be able to attract an offer higher than three or four times your pretax profit. Some owners can get offers that are, on average, 6.1 times their pretax profit. Some can do even better, stretching multiples into double digits. How much time, effort and capital this requires may help you reach a decision to Sell Now or Sell Later.
The good news is that it's not too late to invite us in to discuss an array of suggestions to consider as you contemplate your next step(s). Check in below to begin a confidential conversation about how ready you are to sell.