This is a question unique to every business owner. It involves a multitude of factors and is one of the most important decisions an owner will make in their lifetime, potentially impacting generations to come. 

While only an owner can truly know when the time is right for a sale based on his or her unique set of circumstances, working with an advisor during the early stages of their planning process can reveal insights and answers to common unknowns.

Determine your objectives

The number one objective for many owners is maximizing the value of their company during a sale.  Within the target sale price, however, owners need to consider cash at close vs. deferred value (seller notes, earn-outs) as well as pre-tax vs. post-tax proceeds.  An owner will also need to determine whether he or she plans to retire or maintain a management role in the company after the sale.  If an owner desires a full exit from the business, is the right management team already in place? Owners will also want to have a firm understanding of how a sale will impact their family dynamics in addition to their legacy with employees and the community. 

Assess the ranges of value

Understanding the factors that drive company valuation will play a key role in determining when to sell and at what price. Two specific factors include the company’s historical financial performance, oriented on earnings before interest, tax, depreciation, and amortization (EBITDA), and key performance indicators (KPIs) unique to the business. Additional valuation elements include projected future earnings, factoring the sustainability of the company’s products and services as well as new growth opportunities.  

Factors external to the business that will impact valuation and potential sale price include the national or global industry outlook, mergers and acquisitions (M&A) activity within the industry, and current financing dynamics.

Identify prospective buyer(s)

The potential buyers of a company will offer different purchase prices based on their own objectives. For instance, selling to a strategic competitor will likely net a “premium” price due to perceived synergistic value, but will likely result in the loss of operational control for the seller and create an uncertain future for the existing management team and employees.

Selling to a private equity firm will likely net a “market” price for the seller but might result in more stability for the management team and employees versus a strategic sale.  However, private equity’s objective is to buy and hold a company for a short period (typically three to five years), followed by their own profitable exit.

Even if a private equity firm or strategic buyer might seem to be a good fit, market financing conditions, internal management changes, a recent investment in the seller’s industry (either successful or unsuccessful), or internal bandwidth constraints might mean that when an owner is ready to sell, the target investor is not ready to buy.

A more perennial exit option may be an Employee Stock Ownership Plan (ESOP). An ESOP is a qualified retirement plan that offers business owners an attractive, tax-advantaged exit while also creating a wealth-generation opportunity for company employees.  ESOPs can offer an impactful exit option for owners looking to maximize cash at closing, while maintaining stability for employees and preserving their legacy and reputation in the community. 

Work with an expert advisor who can help you navigate the sales process

Selling a business is more than just financial gain. An owner’s legacy in the community and the long-term well-being of the employees who have helped build their company also carries meaningful weight when deciding on when and how to sell a business. We encourage business owners to weigh all the factors of a potential transaction — financial and non-financial — to determine what is best for their respective situations.

An experienced advisor can help business owners evaluate their options effectively. That is why one of the services we provide to business owners is a complimentary feasibility analysis study.

This free service helps sellers learn more about the structure and the results for shareholders as well as the potential outcome for management and employees if an owner were to sell their business to private equity, a strategic buyer, or into an ESOP structure. As owners weigh their options, this complimentary analysis will help them and their team see the benefits associated with each transaction type, as well as our insights into current market dynamics.