Deciding to sell your business is more than a significant commercial decision; it is often a personal and emotional one, too. Owners have invariably invested tremendous time and energy to create a successful company and think deeply about how and when to pass it on.
Elsewhere we will discuss the factors to consider when deciding whether to sell. Determining when one sells is also a significant decision. Broadly, potential sellers should seek to align three areas including:
- the performance and prospects of their business;
- benign economic and receptive M&A market conditions; and
- their situations and aspirations as shareholders.
Each of the above factors has its rhythm and in isolation may suggest a good time to sell. However, a successful exit starts with clarity about one’s overarching, long-term objectives. Preparation, planning, and execution usually matter more than just embarking on a sale at an apparently favorable time.
Yet, even for owners not intending to sell in the short term, the question of when to exit still can loom. As one former client put it recently after receiving an unsolicited approach, “We’re trying to determine if we get on this bus or wait for another one later.”
That comment hints at a common deal dynamic; if and when one sells their business can be conflated if a process is not managed proactively. Sellers and their M&A advisors should work collaboratively to pursue an exit at the optimal time, rather than reactively responding to catalysts like opportunistic approaches or a seemingly strong sellers’ market.
So, while the timing of a sale is impactful, and should be an input to an exit strategy, there is a difference between proactive exit planning as set out above and trying to ‘time the market’. A few thoughts below follow from this distinction.
External conditions are only one factor
“A stool needs three legs to stand firmly” – Unknown
Timing the market can lead one to focus excessively on external factors such as stock market conditions, credit availability, or buoyant buyer interest. However, proactive exit planning involves considering business-specific issues and shareholder aspirations. Sometimes one should wait for the next bus if the route takes you closer to your destination.
There is no perfect time to sell
“The best time to plant a tree was 20 years ago. The second best time is now” – Chinese Proverb
In a proactively timed exit, owners focus on their long-term goals, recognizing that market conditions (and the impetus they may give to an exit at a particular time) are dynamic. Business sales typically take six months or more from the inception of a sale process. So even if one launches at the ‘perfect’ time, circumstances very well may change during the process.
Long term perspective can allow buyers and sellers to see beyond short-term conditions
“In the short run, the market is a voting machine, but in the long run, it is a weighing machine” – Benjamin Graham
Successful buyers focus on making long-term investment decisions. While headwinds and tailwinds impact short-term levels of M&A activity, good deals can get done in most any market. Sellers should focus on the factors they control – including being well prepared and working with experienced M&A advisers who effectively market their business – and recognize that even in choppy markets, value-creating deals can get done with strong buyers.
Change is the only constant
“You only find out who is swimming naked when the tide goes out.” – Warren Buffet
Deals will have their ups and downs. Optimal sale timing is not an equation with one, immutable answer. One may have to react to emergent powerful adverse market disruptions such as credit crunches, or broad equity sell-offs. Alternatively, during an upturn, or when the company is outperforming expectations, the best course may be to defer an exit or demand more favorable terms from buyers. Sellers should expect to be responsive to changing circumstances.
Hope is not a strategy
“The pain of a loss is twice as powerful as the pleasure of a gain” – Amos Tversky
No seller wants to leave money on the table. However, for lower and middle market companies especially, timing the market is fraught. Waiting for a better M&A market or lower interest rates might increase the achievable EBITDA multiple for a business. Yet the future contains few certainties and lower and middle-market companies often are more susceptible to setbacks. A seller might hold out for a better market only to find that during the wait their company’s profitability or prospects have declined and accordingly so has the company’s value.
Conclusion
At Newport our purpose is to guide our clients to greater value. We believe proactive exit strategy planning is vital. Yet, ‘market timing’ – especially placing undue reliance on external conditions – should not take precedence over proper consideration of an owner’s fundamental and long-term objectives. Owners should neither sell prematurely because the market appears ‘good’, nor defer a sale because one thinks the market could be ‘better’.
