Sign it is time to sell your business #10: you are within five years of when you want to retire

Many business owners underestimate the amount of time it will take to sell and completely exit their business.  The average marketing time for a small closely held business is between 6 and 9 months (depending on what surveys you look at).  However, often there are things that need to be done to prepare the business for sale including gathering and organizing important information, discussing tax implications with a CPA and/or financial advisor, having a broker or intermediary value the business, having the broker or intermediary package the business, etc.  Then after the business has actually sold, it is not uncommon to have a transition period of anywhere from two weeks to three years – which will largely be influenced by how dependent the business is on the seller.  Furthermore, if you are within five years of when you want to retire and something unexpected negatively impacts the business, you may need to continue operating the business longer than anticipated in order to fix the problem before actively marketing the business.

Sign it is time to sell your business #9: a lack of time and capital to pursue another dream

Are you really doing what you want to be doing?  Sometimes it is difficult to step back and put things in perspective because we are most comfortable with the familiarity and security of what we are already doing.  Perhaps your business is interesting and produces significant reliable cash flow, but you aren’t really living your dreams.  Or even worse, maybe you are bored to death, and long to do something else but you feel constrained by golden handcuffs – you ask yourself what sensible  person would exit their stable business for the risk and uncertainty of a new life goal.

However, a sale of your business may provide the capital and time necessary to pursue your dreams.  If you’ve built a successful business you likely have developed significant general management and entrepreneurial skills that should increase your probability of success in a new venture.  If your dream includes a new business venture, it is important to not only consider what you are giving up in cash flow by selling your business, but also the opportunity cost you are incurring by STAYING in your current business.  For example, if your business currently has $700k of cash flow but you believe a new venture will have a high probability of generating $2 million+ in cash flow, then a simplistic way of looking at your opportunity cost is that it would be about $1.3 million a year ($2 million expected minus your current business’ $700k) by continuing on your current path.

Perhaps your dreams don’t include a new business – perhaps they include doing humanitarian work in Rawanda, sailing around the world, or getting a PhD in history.  Your most precious commodity on earth is time.  Some of your dreams may never be realized if you wait until you are older and not as physically capable or as mentally sharp.

Regardless of whether your dreams are business or personal, it is important to remember that selling your business will likely take significant time.  A meeting with a business sale advisor, like Codiligent LLC, may reveal that you will have a better chance of selling your business for an appropriate price if you defer a sale of your business for a year or two while you make some changes.  Even if your business is well positioned to sell, it is not uncommon for a business sale to take several months or sometimes even more than a year.  Often, after a business sale transaction closes, a seller will need to have at least some limited involvement for a reasonable transition period.  Consequently, even if you don’t want to exit for a couple of years, it may be wise to contact an advisor now to start planning for your exit.

Sign it is time to sell your business #8: risk of unacceptable value loss if unforeseen event occurs

Many business owners have a very large percent of their wealth tied up in the value of their business.  As is the case with many types of investments, the closer a person gets to retirement, the greater the risk is that if an unforeseen event causes the business to lose value and marketability that the person may not be able to financially recover prior to when they want to retire.  An unforeseen change could be in the form of a competitive threat, new technology, legal problems, a loss of staff, a shift in government regulations, a natural disaster, a significant problem with suppliers, a collapse of distribution channels, etc.  In an ideal world, if such a problem occurred a business owner would resolve it and restore any lost value to the business.  Yet, doing so can take time – perhaps several years.  Consequently, if a business owner would view having such a loss to be unacceptable, it may be an appropriate time to consider a sale to gain liquidity which can then be re-invested in lower-risk, more diversified investments.

Sign it is time to sell your business #7: lack of management skill necessary to take business to the next level

It is not uncommon for a business to grow to a point where the owner and/or the current management team don’t possess the appropriate skills, knowledge, or experience necessary to take the business to the next level.  For example, a rapidly growing company with potential strong mass market appeal may have succeeded in expanding from a local business to a regional business, but key management may not have the experience or skill necessary to grow the business exponentially to a national brand.  Or, perhaps your business manufactures and distributes products domestically, but there is the perception that creating a strong distribution network throughout Central and South America would be the most logical method of growth, but you aren’t sure how to go about this, you aren’t familiar with the cultural nuances that may need to be addressed, and are not sure what legal and accounting issues may be involved with expanding internationally.  

If you reach a point where you aren’t confident of your ability to successfully manage growth of the company to the next level, you could hire someone to assist with that expansion.  However, there is a risk that because of your lack of experience, that you may not be as adept at even knowing what attributes you should be looking for in new management talent (the old adage, “it’s important to know what you don’t know”).  The danger, of course, is that you plow forward beyond your current competence level, and the business struggles and becomes worth far less (or worse – isn’t worth anything) than if you had sold it while it was doing well and the growth opportunity was still unexploited.   

If you have a business that has $7 million+ in annual revenue you may not need to sell and exit at the same time.  There are private equity groups who would love to have an owner stay on in some management capacity, but the private equity group will also help identify and bring in additional management with the skill and expertise to successfully grow the company (and will bring in expansion capital, as well!).  It is not uncommon in this type of deal structure for a seller to financially benefit from the growth in the business after the private equity group’s investment.

Sign it is time to sell your business #6: inability to meet customer demand

If you’ve been reading this series of blog posts you will notice that this “sign it is time to sell” is related to the past couple of postings.  If you are turning away customers, late in delivering products and services due to lack of capacity, or simply not marketing your business because you have more business than you can handle then it is time to give serious thought to whether it may be an appropriate time to sell.  

A business that is turning away customers may be seen as a huge opportunity for a buyer who may be willing to make the financial investment, staff up, add space and machinery, etc. that you have been unwilling to do.  If you are experiencing a lack of capacity and choose not to sell the business,  but don’t remedy your ability to meet customer demand, then you risk an eventual loss of customers due to dissatisfaction and are inviting an aggressive competitor to enter your marketplace to meet the unsatisfied demand.  

Sign it is time to sell your business #5: you are unwilling to make capital expenditures necessary for growth

Many business owners get to a point in time where they don’t really want their business to grow – they are comfortable with its size and profitability.  Making capital expenditures to facilitate growth may necessitate using debt or putting more equity capital at risk, and some business owners may simply not want to do so, especially if they are considering exiting the business in a few years.  Yet a business that isn’t growing is, in effect, slowly dying.  If there are capacity problems where a business can’t meet the demands of their customer base, eventually they will likely lose those customers to a competitor who can satisfy that demand.  Failure to grow may also result in a loss of key employees.  If employees see their growth, advancement, and income potential being limited because of a perceived slow-down or stagnation of the business, they may decide to seek employment with a company where they will have greater advancement opportunities.  

However, it is not an illegitimate concern about whether to make capital expenditures or not if you are seeking to exit a business in the not-too-distant future.  Spending $100,000 on a piece of equipment that may lead to $20,000 in additional profitability per year may be a good decision for the business long-term, but in some cases it may not result in a dollar-for-dollar payback if the business were sold within a year or two.  

So if you have reached a point where you know your business needs to make some capital expenditures necessary for growth it may be wise to contact a business broker to discuss your situation.

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.

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 #3:  new industry products or services are making your business obsolete

Is there a new product or service that has been introduced by a competitor that over time could make your business obsolete?  If so, are there new products or services that you are in the process of launching that will enable your business to be more competitive with your competitors’ market-changing products or services?  If not, you may want to consider immediately marketing your business.  

Often by the time that a business owner recognizes that new products or services offered by competitors may lead to their business’ obsolescence, the business is already obsolete, it is just taking a bit of time for customers to shift over to the new technology.  There is the oft-told, but very relevant, story about the demise of the buggy-whip industry after automobiles replaced horse and buggies.  Had the owner of a buggy whip manufacturer chosen to sell their business when the automobile was introduced and there was a low level of adoption of the automobile technology, the business owner likely would have had success with the sale of the business.  However, if the buggy whip manufacturer waited until Ford brought mass production and lower costs using assembly lines to the world, it is likely that the buggy whip manufacturer would have had a much more difficult time selling the business for a reasonable price (if able to sell at all).   Any buyer for the business would have recognized that over time the industry would greatly diminish.

There are plenty of modern day examples.  A couple of years ago I tried to help sell a software development company that had become obsolete.  The company produced a niche software, that was very-user friendly and had some unique features which attracted large Fortune 500 business subscribers.  However, other much larger software companies continued to invest in making competing products more robust with sophisticated bells and whistles and more attractive user interfaces which made my client’s software far less competitive despite its ease-of-use strengths.  By the time the owners of the software development company decided to try to sell the business, they had lost a large number of their clients, and ultimately the business had become obsolete enough and lost enough market share that it was not marketable.

If you suspect that your business may be becoming obsolete and you are not willing to make the changes to prevent this, it is probably time to sell – if it’s not already too late.

]]> http://portlandbusinessbroker.org/2009/04/20/sign-it-is-time-to-sell-your-business-3-new-industry-productsservices-are-making-your-business-obsolete/feed/ 0 bizsale http://portlandbusinessbroker.org/2009/04/06/sign-it-is-time-to-sell-your-business-2-failure-to-upgrade-technology/ http://portlandbusinessbroker.org/2009/04/06/sign-it-is-time-to-sell-your-business-2-failure-to-upgrade-technology/#comments Mon, 06 Apr 2009 16:07:37 +0000 bizsale http://portlandbusinessbroker.org/?p=293 ]]> 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 #2:  failure to upgrade technology

Sometimes I encounter business owners who see their competitors upgrading technology but choose not to do the same. Often the argument for not upgrading is that “we’ve been successfully operating for the past 20 years – why change something that isn’t broken” or “upgrading technology will require a large investment of time and money and I don’t think it will be worth it” or “it’s probably a good idea, but I haven’t had time to look into it and I don’t know when I will.”  

While certainly there is risk associated with implementing new technology, and I’m not advocating that a business owner should be a lemming when it comes to new technology, there is a very real danger to the marketability and value of a business that doesn’t keep up with technological changes.  

For example, if an investment of $500k in a new machine will enable your business to generate $100k in additional cash flow per year, not only will it pay for itself  quickly, but it will also add value to the business through the additional cash flow it generates.  

While it is true that some buyers like to find businesses they can fix, there is a very real danger that by deferring the use of new technology for too long that you will find your business eroding as others in your industry use technology to become more competitive by delivering greater value and efficiency.  Once your business begins to decline there will be an erosion in value and marketability that may be difficult to recover from in a short period of time.  

There are many reasons you may choose not to keep up with technological changes in the industry, but if you are at that point, you may want to talk with a business broker or investment banker to discuss whether it may be a good time to explore a sale of your business.