By Richard Parker, President of Diomo Corporation. Richard is the author of several books and, has over 100 published articles to his credit on buying and selling businesses. He is one of the country’s most successful mid-market mergers and acquisitions professionals.

When Is It The Right Time to Sell?

Every business owner will surely answer this question by stating: “As soon as someone walks through the door with bags of cash.” Unfortunately, the chances are slim that will happen. However, if you own a business, the day will come when you will want to sell it. In fact, according to industry statistics, the average small business changes hands every five years. With this in mind, you need to think about when is the best time for you to sell your business.

Most business owners have a thought in back of their minds that they will at some point (hopefully), sell their business for lots of money. Who can blame them? After all, isn’t this part of the allure of getting into your own business?

While there are drastic differences between selling a business and a piece of property, there are certain common fundamentals with “market timing” being the most critical. The good news is that unlike real estate when there are cycles of seller and buyer markets, the supply/demand curve in business sales ALWAYS favors the seller. Let me explain: On the buy side, there are always tons of people looking to buy a business; most never do. On the sell side, most businesses listed for sale, never sell. However; there is ALWAYS a shortage of “good” businesses. In fact, when a “good” business hits the market, it can be under contract within days. (If you want to know what a “good” business is, see the article by the same title).

Now that you know you can always find a buyer for a good business, let’s get back to when it is the best time to sell.

When Business Is Good…

Undoubtedly, when the business is at or near its peak of revenue and profitability in its recent history. This does not mean you think it’s at the top and will decline. The peak simply indicates that it is on an upward trend compared to prior years. Or, you feel that you have taken the business as far as you are capable of doing and someone else either with new blood, or different skills, can take it to the next level. Think of it this way: if the business were an athlete, when would be the best time to be eligible for free agency? Right after a “career year”…right? The same holds true for a business. The best time to sell are when things are going well. You’ll get a higher price, better terms, and a quicker sale (on this note, you may be interested to learn that the average business takes 7-8 months to sell). Trying to sell a declining business is simply more challenging for everyone on the sell side.

While it would be ideal to sell when the business is on a high note, at the very least, having the business demonstrate several years of stable revenues/profits is also considered an excellent time to bring it to market. Keeping in mind that one of the greatest unknowns to a buyer is can the business transition to them and continue as it was before, having the ability to show them several prior years of stability will go a long way in soothing their worries.

What If The Business Is Not Doing Well?

There can be reasons beyond your control that force you to sell a business when things are not going well. In these cases, you need to do what you can to get the best deal possible. If getting out is the most important thing, then you‘ll want to do the following:

Address any immediate problems with the business. Without being reckless, decide what may be the one or two biggest issues/negatives that a prospective buyer may identify in the business. Then, do whatever you can do either repair it, or to lessen the severity of the problem.
Write up a detailed and realistic business plan that you can present to prospective buyers that outlines exactly what you would do over the next one to three years if you were not “forced” to sell. By laying this out in a realistic and logical fashion, a buyer will be able to see that he can execute the plan. Above all, be realistic. This is not the time to be delusional. This plan may ultimately be your biggest asset as a seller.
Be open to a deal that may involve a larger than usual seller note, or earnout/performance based term whereby you can get a higher price based upon the future, short-term performance of the business.

What Buyer’s Want and Need

The reason why people will buy an existing business (often paying a premium) versus starting one from scratch is because there are some known factors that can mitigate their risk such as:

• Immediate cash flow
• Built in infrastructure
• Historical financial data
• Customer base
• No start up hiccups

Given this, business buyers will pay a premium for business where revenues and profits are trending up, or at the very least are stable. Most people do not have the experience to turn around a declining business, especially when they haven’t done so before. The typical small business buyer mentality is: takeover on Monday, collect a paycheck on Friday (a bit of an exaggeration, but not much). Plus, it is far easier to finance a growing business than a declining one. This is certainly true when government loan programs are in place that may use the worst of the last 2-3 year’s of tax returns as a basis for the business to service the debt.

Warning: Leave Some Juice in the Fruit not Cash on the Table

It can be very tempting to keep hammering away at the business when things are going well. You’ve worked hard, the fruits are paying off, the systems are in place, and you have a solid comfort with what you do each day. These are all rational thoughts. Also, when a business has experienced some ups and downs, it seems almost crazy to consider selling when things are consistently good. Yes, it may seem hard, but just like a house, if you ultimately know that you want to sell it within a year or two year, and the market is on “fire” now, shouldn’t you be opportunistic and sell it when you think it is at, or near the high?

A buyer must be able to see that the business has a very viable future with them as the new owner. You need to have the business operating well, with a bright outlook. You may find yourself in a situation where new business is coming in or there are some lucrative contracts pending. It would be easy to convince yourself to postpone the sale and benefit from these revenues. However, these are precisely the situations that buyers want to see and have in placed when they take over. Although these could trigger an “earnout” or performance type deal, nevertheless, providing a bright future for a buyer is very enticing to getting a deal done; which is ultimately the goal…right?

While there is always a market in place for good businesses, the amount of money and deal terms you could benefit from when the business is doing well, is staggering compared to the opposite. I like to compare it to the toy business that I was involved with about ten years ago. We sold licensed or themed merchandise (i.e. Mickey Mouse watches and Cabbage Patch products). When the license was “hot”, my dog could have gone to the major retailers and walked out with orders, but when a license’s popularity dies, I couldn’t give the product away. It could have been easy to get caught with a warehouse of inventory that could wipe out all the profits made when it was popular. So, my partner and I decided that once a license hit its peak (at least in our estimation) we would be “sold out”. No more inventory. Sure, we missed out a bit of profit one or two licenses but we never had to liquidate product and wipe out all the prior profits. In all, we made a lot of money.

The same holds true for a business. Sell when it’s doing well. Better yet, sell it when it is doing great. It is infinitely easier to convince any buyer to pay a premium when the business is thriving. Moreover, with the number of buyers, and the shortages of good businesses, you may wind up having several interested parties “bidding” on your business and that’s a whole lot better than trying to convince someone to buy it..

About the Author
Richard Parker is President of Diomo Corporation (www.diomo.com) and founder of Diomo Solutions, LLC (www.diomosolutions.com) He is the author numerous books and articles on buying and selling small businesses which are sold in over 70 countries. He is also one of the leading business intermediaries in The United States assisting both buyers and sellers. Mr. Parker has personally sold nine of his own businesses since 1990. You can Email Richard with any comments or questions you may have about selling a business or to learn more about his intermediary services.

This article is © Copyright 2006 by Richard Parker and may not be reproduced in any format whatsoever without prior written consent of the author.

The recommendations of reading, reference materials or links mentioned, are for general informational purposes only. The materials are intended as a public service and are not a substitute for obtaining professional advice from a qualified firm, person or corporation. Consult the appropriate professional advisor for complete and up-to-the-minute information. These materials do not constitute the rendering of any legal or professional services.