When should you sell your company? While decisions to sell a company are at times prompted by factors that affect a business owner which are unrelated to the performance of the company or larger market realities, as a general rule these types of sale decisions do not lead to an optimal sale price. Timing the sale of your company is crucial to achieving the best possible outcome, and aligning the decision with favorable market and company conditions will often result in a higher sale price and smoother process.
Given that many business owners who sell a company are motivated by a desire to obtain the highest price possible, it is important to analyze the factors that investors take into consideration when making a company acquisition. Timing the sale of your company with these factors will generally lead to a better overall sales strategy, a speedier sales process and better sale terms for business owners.
“Aligning the process of selling a company with the motivations of the founders, the company’s performance factors of the company and the realities of the market in general can greatly improve the chances of selling a company and can greatly improve the chances of selling a company and getting better sales terms.
sales terms.”
Reasons to consider selling your company
There are different reasons to consider selling your company, which may include personal, family, legal, economic, corporate, or competitive factors.
- Personal reasons could be physical or behavioral issues.
- Family reasons often arise when disagreements about succession occur.
- Legal factors, often beyond your control, could be changes in legislation.
- Economic reasons may stem from a lack of funds or the search for new investments.
- Corporate factors involve shareholder decisions, while competitive threats could be predicted if addressed in time.
Beyond surface-level reasons such as personal, family, legal, economic, corporate, or competitive factors, deeper motivations may require aligning the company sale process with the founder’s goals, company performance, and broader market realities. Doing so can significantly improve the likelihood of a successful sale and better terms. When these deeper factors are thoroughly considered, it often leads to a more informed and profitable sale decision.
When to Sell: Founder, Company, and Market Considerations
Founder Factors in Timing of Sale
Business owner motivation for selling a company can be based on factors that are specifically related to the founder rather than those that are related to the company or the larger market. These factors can include:
- A decision by the founder to spend his or her time on a different business activity.
- A decision by the founder to retire and spend more time with his or her family.
- A desire by the founder to “cash out” and convert his or her ownership position into money to invest in a different venture, pay financial obligations or distribute to members of his or her family.
- An illness of the founder or other situation that makes it difficult for the founder to continue with the business.
While each of these factors is of course a valid reason for the decision to sell a company, if a decision to sell a company is made completely independent of a consideration of factors related to the company and the larger market, the company will often not be sold for its optimal price, particularly when these factors are not favorable.
Company Factors in Timing of Sale
A second set of factors that may affect a business owner’s decision to sell a company are factors that are specifically related to a company. These factors can be broadly divided into positive or negative events.
Positive Company Events
One trigger of the decision to sell a company can be a positive event in a company that is independent of market circumstances. This type of event is often related to a company’s financial performance, but it can also involve:
- The development of technology.
- The discovery of an important natural resource.
- A significant ramp-up of the company’s market presence.
- Or the announcement of the company entering into a valuable strategic relationship.
Negative Company Events
A second trigger of a company sale decision is a negative event at a company that is independent of market circumstances. The first type of negative event is one that affects the financial viability of a company. Examples of this type of event include:
- A loss of major clients or business channels.
- A sustained drop in revenues or an increase in fixed costs.
- A significant increase in the company’s cost of capital.
- Major litigation.
A second type of negative event or issue is one that does not directly impact the financial viability of the company but rather relates to the willingness of company founders to continue to work together. This might be due to, for example, a major disagreement between the owners about how a company should be run.
Market Factors in Timing of Sale
A third set of factors that may affect a business owner’s decision to sell a company is related to the realities of the market where the company does business.
Positive Market Factors
Business founders may be motivated to sell their company due to positive market factors. This can include strong country GDP growth or favorable sector trends. A sudden surge in home affordability, for example, may greatly increase the interest of investors in buying companies that provide real estate loans. A large growth in the mining industry will likely increase the interest of investors. This will lead to more demand for purchasing companies that provide mining services.
Negative Market Factors
Negative market factors may also be strong drivers of decisions to sell a company. A business owner who believes the economic or political situation is worsening may decide to sell their company. This decision aims to avoid further deterioration of conditions. In such scenarios, timing the sale of your company early in the cycle of negative market trends can help mitigate financial losses.
The Investor’s Perspective in Timing of Sale
A successful M&A deal, of course, is not only dependent on the motivations of a seller. Many investors will view positive and negative company and market factors similarly to a business owner. However, there are additional factors that are particularly relevant for investors. These factors often significantly affect their investment timing.
Many investors use leverage when making acquisitions. As a result, appetite for acquisitions generally increases when debt financing is more available and interest rates fall. The current global low interest rate environment has contributed to many companies searching for acquisition targets.
For investors that invest across borders, exchange rates can be an important deal timing consideration. If the currency of the country where the company is located weakens, it will lower the effective cost of the acquisition. This makes the acquisition more attractive to potential investors. Similarly, a currency that has historically or is currently experiencing significant volatility creates increased uncertainty. This uncertainty generally lowers the price that an investor is willing to pay for a company.
With respect to cross-border investment strategies, one of the most significant factors influencing an investment decision is a country’s general risk profile. This factor often has the greatest impact on investors’ choices. When a country’s risk profile significantly increases, the price that investors are willing to pay for a company often falls substantially. This can occur even if the company is essentially insulated from the factors driving the general country risk.
When a country’s risk profile significantly increases, the price that investors are willing to pay for a company often drops substantially. This can happen even if the company is essentially insulated from the factors that are increasing general country risk.
Timing the Sale of Your Company
While the decision to sell a company may be motivated by reasons that are not financial in nature, business owners should be aware of key factors.
These factors can significantly impact the sale price and the timing of the transaction. Additionally they are crucial for maximizing the price of the sale. Both company and market factors can have a significant impact on the sale price.
“Entrepreneurs should, as far as possible, time the sale of their company. This timing should coincide with the company’s positive factors. In addition, they should consider aligning it with favorable market conditions.”
Due to this, business owners should, to the extent possible, time the sale of their company. This timing should align with positive company factors. Additionally, they should consider aligning it with favorable market conditions.
Additionally, the timing should coincide with the financial, economic, and risk management drivers that influence investor company acquisition decisions.
This article was written by Darin Bifani. If you would like to know more about how to sell your company, take a look at YOU CAN SELL YOUR BUSINESS AND STAY AS OWNER.
The photo for this article was taken by Andrik Langfield Petrides.
