The most common answer to the question of when to sell your business is “it depends." No single formula is right for every situation.
“There are so many different scenarios because there are so many different kinds of buyers and businesses," says Ladd McGowan, owner of NorWest Business Sales Inc., which specializes in business sales, appraisal, and valuation for companies that sell for between $100,000 and $5 million.
When to sell a business can be informed by many eventualities, such as deteriorating health or divorce. But experts agree that in an ideal world it's best to do it in a deliberate, planned manner so you can recoup as much value as possible.
Reasons for selling a business
Prearranged plans, the market, and life circumstances can all dictate when it's time to sell a business. Best-case scenarios are those in which a business owner executes a plan to sell after a specific number of years or at a specific point due to the likely behavior of the market.
Other reasons one might sell are more personal, such as a death in the family, a health problem, a caregiving need, or a divorce or separation. In many cases, a longtime business owner simply decides it's time to retire.
“Health and retirement are the top reasons business sell," McGowan says.
Personal issues that force a sale can lead to a disappointing result since a rushed transaction leaves little time to ensure the business' affairs are in the best possible shape.
“If there's a pressing issue with the sale, they may be leaving money on the table because their financials may not be in order," says Dustin Zeher, owner and principal broker of Horizon Business Brokers LLC. “The value of the business will be based on the financials of the business, especially the cash flow."
Rushing to market before improving operations and cash flow may even result in a failed sale. This is actually quite common. Only a small fraction of businesses put on the market ever sell. A business with poor cash flow and no buyer is likely to be forced to liquidate instead, providing a poor return on value.
Getting ready to sell
Many business owners make the decision to sell relatively suddenly. Perhaps they've gotten burned out or realize they don't have the skills for digitization. Maybe a new business opportunity they want to pursue has popped up or the birth of a grandchild sparks the desire to retire. These reasons can feel urgent, but it's best to take a measured approach to get the most out of the sale.
The best practice according to experts is to start getting your business in order three years before you intend to sell it. Get an attorney and your accountant involved.
“A scheduled exit is the best way to do it," McGowan says. “The wise owner starts preparing his business. He cleans up his books and records. He does the maintenance and repairs he's been putting off for eight years. He upgrades his vehicles."
The goal, he says, is “getting his business to look as sweet as it possibly can, financially as well as visually."
For Zeher, the financial aspect is paramount: A business's cash flow is the key metric that gets buyers to buy and motivates lenders to lend to those buyers. Planning to sell three years ahead gives a seller the chance to run “clean, clear financials to accurately determine the cash flow" during that time, he says.
Once you've reached the appointed year to put your business on the market, look closely at when exactly to list it. If you're selling a cyclical business, trying to sell during your quiet season is a good move. Otherwise, list your business anytime between mid-March and November to avoid holiday and tax seasons, Zeher advises.
If you've planned well and set the stage for a successful sale, you'll likely find an enthusiastic buyer and get a good return on the enterprise you've carefully built.