Archive for the ‘timing’ Category

When is the right time to sell?

Tuesday, February 5th, 2008

The short answer is never, unless it makes sense from a personal point of view.

There are brokerage firms that call people when business is booming and the economy is humming along and tell prospective sellers that now is the time to sell, while prices are high and business is good. You’ll get a higher multiple, they claim, and there is an element of truth to that. However, as we know the market environment can change in days or weeks and selling a business takes months or years. How do you know that your business will sell before the market turns down? Conversely, the good times may last years. If you are growing at 25% a year and sell today, who’s to say that you wouldn’t have been better off waiting three years and selling for double (25% compounded over three years is 95%).

When business is bad, companies consolidate and the same brokers who argued that you should sell during the good times now point to the industry consolidation and use that as a reason that now is the time to sell. They say that you should sell before the economy gets worse, before too many competitors merge and leave you as a smaller player.

Here’s a dose of the truth. It almost never makes sense to sell a healthy business based on a strictly financial analysis. If I can get you 3 times earnings today you’re better off waiting 3 years then selling (even if you can only sell for a penny). If I can get you 5 times earnings you’re better off waiting 5 years, 7 times earnings; wait 7 years and so on.

Yes, there are advantages to selling now. Selling frees up your time which is worth something. Selling allows you to diversify your financial holdings and reduce risk. However, the time to sell is when you begin to feel burned out, you’d like to travel, or spend more time with your family. In short, sell when it makes sense for personal reasons. Sell when selling makes you happy.

Bottom line: don’t try to time a process that takes months or years to hit a particular day or week. Maximizing the multiple is nice, but unless you know how long a transaction will take, what will happen with your particular business, what each prospective buyer’s finances will be like in the future, and when markets will peak with some degree of certainty, it’s not an achievable goal. If you can accurately predict markets performance months in advance play the stock market and get rich.