There are a variety of conditions that may indicate that it is a good time to contact a business broker to explore exit strategies. This blog post is part of a series about signs or indicators that it may be time to consider a business sale or exit.
Sign it is time to sell your business #4: anticipated decline in revenue or profitability
Business buyers base the price they are willing to pay on the level of cash flow they expect to receive from a business in the future. This means that trends in sales and profitability can significantly impact a business’ price and marketability. For example, Company A and Company B may both currently have annual revenue of $5.4 million with EBITDA of $1.2 million, but could command significantly different prices because of trends in performance. Perhaps two years ago the revenue for Company A was $4.7 million, last year it was $5.1 million, this year it is $5.4 million, and next year it is projected to be $5.6 million. That’s a pretty nice and steady upward growth trend. Perhaps Company B had $4.7 million in sales two years ago, last year it was $5.5 million, this year it is $5.4 million, and next year it is projected to be $5.1 million. While company B had the same revenue as Company A did two years ago, and it currently has the same revenue, the past year has shown a decline, and the business is projected to decline further next year. Assuming that EBITDA margins are relatively consistent, and all other things are equal, most buyers would prefer the steady growth of Company A, over the recent declining revenue of Company B, even though they both have the same level of current revenue and cash flow. Unfortunately, the problem isn’t just that many buyers will pay a lower price for Company B, but also many won’t be interested in buying it at any price because of the declining performance. Those buyers who are willing to buy Company B will be more likely to seek seller financing, an earn-out, or other creative deal structures. Consequently, if your business has experienced a nice record of growth over the past few years, but you are not confident that it will continue at a similar, or better, pace in the future, then it may be a good time to consider selling.
