When is the Right Time to Sell My Company?

Most business owners want to know: when is the best time to sell their business. In this article, we are going to discuss how to forecast trends and general market conditions in your industry and how to use business and personal expectations to determine the best time to sell.

When you invest in the stock market, your advisor will tell you not to "time" the market since you should be investing with an eye towards long-term returns. Some listen to that advice but many don't because most people know that timing can be everything. When one of your stocks doubles in a week, it's difficult to sell because you assume it will continue on that path. As we all saw a couple of years ago, the market could easily do just the opposite and in 2007 many people lost substantial amounts of money-in some cases, the majority of their net worth. While the verdict may be out on the benefits of timing the stock market, there is no doubt that timing is incredibly important in the sale of your business due to several reasons:

• Most business owners have a significant concentration of their net worth in their business
• Business financials and value will typically fluctuate more than the GDP or stock market
• Most businesses are vulnerable to huge value fluctuations caused by the death of key shareholders, litigation, loss of a major contract or various other reasons
• In addition, because it can take 8-12 months to find a buyer for smaller businesses and to close on the transaction, timing is much more critical than investing in the stock market, where shares are highly liquid and can be disposed of within minutes with only nominal transaction costs. Moreover, business owners should anticipate where their business will be 8-12 months out from any given date, because financials and the market conditions 8 - 12 months from the date the business owner begins the selling process usually dictate how much a business owner stands to make from the sale of his business.

Let's look at the first variable: what are your financials going to look like in 8-12 months? Buyers are notorious for trying to slash your company's price before close if your revenue or EBITDA drop. Secondly, if you provided the buyer with forecasted financials and you are far from the first year target after 8 -12 months, they may decide to drop the price before close. Don't fall into the trap of thinking once you have closed out last year's financials and have an acceptable Letter of Intent from a buyer that you are going to close with the terms agreed upon at the beginning of the deal. So from your company's financial position, commit to the sale at a time 8-12 months PRIOR to when you think revenue and EBITDA will be higher than it is now.

Now let's look at market conditions. While the stock market may be a good indicator of market trends, you still have to consider the fact that market conditions at the time of close are typically the most important indicators because they give buyers another chance to reevaluate whether your company is still a good opportunity. Public stock valuations and overall M&A trends are not a good enough indicator to determine what is happening in your industry or for deals sized similarly to yours, so don't completely rely on such indicators. It is important to look at the statistics that are relevant to your company, determine what variables drive trends and make an intelligent guess about what is going to happen.

Here are a few market forces to consider and our guess about how they will affect different market sizes:

• Will capital gains tax increases in 2011 cause people to sell stock in public companies and thereby cause a subsequent market/valuation dip in public companies at the end of this year? Probably. This dip in prices could subsequently cause a buying spree of public companies by other public companies. Will the capital gains increase cause a valuation dip in private companies at the end of this year? Probably not. Here, the 8-12 month lead-time required to close a deal may be an advantage since it is unlikely that there will be a flood of private companies starting the sale process towards the end of this year for pure tax reasons.
• If inflation hits, generally, the trend is a negative hit to stock valuations of both large and small companies because interest rates rise and make bonds more attractive to investors.
• If approximately 70% of private businesses wish to sell in the next 10 years as many expect because of the retiring baby boomer population, will it affect valuations of private businesses? You bet. Will it affect public companies? Much less so.
• Through the recession, both private equity groups and strategic buyers tended to favor smaller companies. As both strategic buyers and private equity groups have record amounts of cash, the size of acquisitions they will want to make will increase, making larger companies more attractive again.
• When looking at various industries, it's important to note how they are affected in relation to the stock market and economy. Here are some take-aways by industry:

• In 2009, the total value of Healthcare and Consumer Staple deals (under $500 million) done in North America were significantly higher than in any other year in the last five years. Why? Because those are the industries everyone runs to when the economy is bad. In 2010, middle-market companies in those industries haven't been as attractive
• 2007, was, by far, the best year in the last five years for Consumer Discretionary, Utilities and Information Technology deals (under $500 million). 2009 was the worst year for all three industries. These industries tend to mirror the general stock market.
• Industrials and Manufacturing total deal value hit its low in 2009 and has now rebound on an upward trend to be even higher than 2006!
• Energy and Materials companies tend to follow their respective market trends.

Is now a good time? For small companies in many industries, now is a good time. We're at an inflection point where deal sizes will begin to increase, there will be a bigger supply of small and middle-market business sellers in the next few years and right now, for many industries, valuation multiples are good.

The "right" answer does vary from company to company, so you should discuss with an advisor like Orion Capital Group (www.orioncg.com) to determine when will be the right time for you and your company.

Neil Shroff is the Manging Director of Orion Capital Group, a mergers and acquisitions advisory firm. Neil is well-versed in mergers and acquisitions, operations, business development and management consulting. Prior to founding Orion Capital Group, Neil co-founded an overseas manufacturing outsourcing firm. During his tenure, Neil acted as the lead for two strategic acquisitions, and eventually worked closely with the board of directors to lead the sale of the firm.

Previously, Neil was a Managing Director for a Jefferies Capital Partners portfolio company where he led the company's transition from a position of financial and operational distress to position of profitability. In his early career, Neil was a management consultant at SRI International and another small consulting firm where he focused on developing strategic recommendations for numerous clients in the biotech, medical device, and material technology industries.

Neil has a B.S. in Bioengineering from the University of California, San Diego. Neil has also lived in Japan and conducted extensive business in India, and China.